users given ( v ) the responsibility for assessment of customer suitability and appropriateness is squarely on the market maker. there are a detailed set of requirements that the market maker needs to fulfil in this regard while selling any product to a user. as the recent experience in many countries shows, inappropriate understanding of complex derivatives by the buyers of these can have serious repercussions. the argument of caveat emptor does not really work in practice, as many countries are realising on account of huge derivative losses. it is ultimately a systemic issue and it is important, in the interest of sellers of the products as well, that sufficient suitability assessment is done before selling the product. ( vi ) all otc forex and interest rate derivatives attract a much higher credit conversion factor ( ccf ) than prescribed under the basel framework and all exposures are reckoned on a gross basis for capital adequacy purpose. the applicable ccfs were increased in 2008 since it was felt that the conversion factors prescribed under the basel framework did not sufficiently capture the market volatility of underlying variables in the indian context. ( vii ) exposures of banks to central counterparties ( ccps ) attract a zero risk weight as per basel norms. additionally, collaterals kept by banks with the ccps attract risk weights appropriate to the nature of the ccp as reflected in the ratings under the basel ii standardised approach. the latter was incorporated by rbi as ccps cannot be considered risk free entities. ( viii ) all permitted derivative transactions, including roll over, restructuring and novation are required to be contracted only at prevailing market rates. this ensures that non - market rates are not used to manipulate cash flows current and future. ( ix ) there are regulations for participation by non - residents in derivative transactions. this basically flows from the capital account management framework which places certain restrictions for participation by non - resident investors in the forex and interest rate markets. 3 4. clearing and settlement infrastructure for otc derivatives in india as early as in 2002, the clearing corporation of india ltd ( ccil ) commenced guaranteed settlement of inter - bank spot forex transactions and all outright and repo transactions in government securities, whether negotiated or under order driven systems. ccil has commenced non - guaranteed settlement of otc trades in irs / fra in november 2008, covering over 75 per cent of the market turnover. ccil also offers certain post - trade processing services like resetting interest rates and providing settlement values to

is supposed to bring into the model code books of financial service providers. we have a plethora of instances of mis - selling and customers undertaking financial contracts without understanding the risk import of such transactions leading to unforeseen volatility and unsustainable business. 13. financial literacy is also a necessary pre - condition for success in financial inclusion drive. dimensions of this issue can be gauged from the recent paper by the financial action initiative, a consortium of researchers. for the benefit of this august audience, let me quote 3 important findings of the paper : • 2. 5 billion adults, just over half of world ’ s adult population of 4. 7 billion, do not use formal financial services to save or borrow. • 2. 2 billion of these unserved adults live in africa, asia, latin america and the middle east. • of the remaining 2. 2 billion adults who are financially served, a little more than 800 million live on less than us $ 5 per day. 14. with such estimates of the dimensions of the financial exclusion problem, and the understanding that achieving financial inclusion is not possible without financial literacy, the promotion of financial literacy acquires an even greater urgency. 15. financial literacy can be promoted by bringing in wider section of public within the institutional literacy framework. such institutional initiatives would largely focus on improving literacy standards. also, all financial service providers have a moral responsibility to bring in a fair degree of transparency and fairness, more so those engaged in selling financial products and financial counseling and the ethical grid within which they are supposed to work. this initiative is no less challenging than propagating financial literacy to the members of the public. 16. hence, there is no doubt that financial literacy should be one of the key initiatives in coping with the ever - expanding horizon of risk. in rbi, we have started a unique public interface programme whereby rbi is trying to bridge the gap in understanding regulatory perspectives of some key policy initiatives. however, reserve bank or central banks or bank regulators acting alone would not be successful in meeting this extraordinary responsibility in propagating financial literacy and bringing transparency in dealing with financial services and products. wider and active participation of all stakeholders like other financial regulators, government – state & federal both – financial service providers, academia and others in civil society, is needed in this grand initiative. also we require massive global efforts and co - operation for achieving tangible results in this area. 17. i am happy to share that the whole - hearted participation by