RBI said to query bank valuations of some bond derivative trades

What happened: The Reserve Bank of India told some lenders during recent in-person audits that bond-forward trades should use Level 3 inputs for valuation, according to people familiar with the discussions. Key numbers: Notional value of such trades totaled 1.1 trillion rupees ($11 billion) this year, per clearinghouse data. Why it matters: Level 3 classification relies on a bank's own assumptions and can force banks to limit dividend payments and leave them with less regulatory capital under RBI rules. Banks are discussing solutions with industry associations and clearinghouses.

The Reserve Bank of India told some lenders during recent in-person audits that bond-forward trades should use Level 3 inputs for valuation, according to people familiar with the discussions.

Level 3 classification relies on a bank's own assumptions and can force banks to limit dividend payments and leave them with less regulatory capital under RBI rules. Banks are discussing solutions with industry associations and clearinghouses.