REGULATIONS(DERIVATIVES)


 FAQs-DERIVATIVES

(Please refer to RBI Master Direction on RISK MANAGEMENT , for detailed guidelines on this subject. Following is the gist of the important guidelines available in the Direction. The Direction is available at www.rbi.org.in – >Notifications -> Master Directions -> Financial Markets.)          

 (A) Facilities for Persons Resident in India                                      (UPDATED 2nd April 2018) 

1) Contracted Exposures

AD Category I banks have to evidence the underlying documents so that the existence of underlying foreign currency exposure can be clearly established. AD Category I banks, through verification of documentary evidence, should be satisfied about the genuineness of the underlying exposure, irrespective of the transaction being a current or a capital account. Full particulars of the contracts should be marked on the original documents under proper authentication and retained for verification. However, in cases where the submission of original documents is not possible, a copy of the original documents, duly certified by an authorized official of the user, may be obtained. In either of the cases, before offering the contract, the AD Category I banks should obtain an undertaking from the customer and also certificates from the statutory auditor (for details refer para B (b) for General Instructions). While details of the underlying have to be recorded at the time of booking the contract, in the view of logistic issues, a maximum period of 15 days may be allowed for production of the documents. If the documents are not submitted by the customer within 15 days, the contract may be cancelled, and the exchange gain, if any, should not be passed on to the customer. In the event of non-submission of the documents by the customer within 15 days on more than three occasions in a financial year, booking of permissible derivative contracts in future may be allowed only against production of the underlying documents, at the time of booking the contract.

The products available under this facility are as follows:

i) Forward Foreign Exchange Contracts

Participants

Market-makers – AD Category I banks

Users – Persons resident in India

Purpose

a) To hedge exchange rate risk in respect of transactions for which sale and /or purchase of foreign exchange is permitted under the FEMA 1999, or in terms of the rules/ regulations/directions/orders made or issued there under.

b) To hedge exchange rate risk in respect of the market value of overseas direct investments (in equity and loan).

i) Contracts covering overseas direct investment (ODI) can be cancelled or rolled over on due dates. If a hedge becomes naked in part or full owing to contraction (due to price movement/impairment) of the market value of the ODI, the hedge may be allowed to continue until maturity, if the customer so desires. Rollovers on due date shall be permitted up to the extent of the market value as on that date.

c) To hedge exchange rate risk of transactions denominated in foreign currency but settled in INR, including hedging the economic (currency indexed) exposure of importers in respect of customs duty payable on imports.

i) Forward foreign exchange contracts covering such transactions will be settled in cash on maturity.

ii) These contracts once cancelled, are not eligible to be rebooked.

iii) In the event of any change in the rate(s) of customs duties, due to Government notifications subsequent to the date of the forward contracts, importers may be allowed to cancel and/or rebook the contracts before maturity.

Operational Guidelines, Terms and Conditions

General principles to be observed for forward foreign exchange contracts.

a) The maturity of the hedge should not exceed the maturity of the underlying transaction. The currency of hedge and tenor, subject to the above restrictions, are left to the customer. Where the currency of hedge is different from the currency of the underlying exposure, the risk management policy of the corporate, approved by the Board of the Directors, should permit such type of hedging.

b) Where the exact amount of the underlying transaction is not ascertainable, the contract may be booked on the basis of reasonable estimates. However, there should be periodical review of the estimates.

c) Foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank, where such approval is necessary or Loan Registration Number is allotted by the Reserve Bank.

d) Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) will be eligible for hedge only after the issue price has been finalized.

e) Balances in the Exchange Earner’s Foreign Currency (EEFC) accounts sold forward by the account holders shall remain earmarked for delivery and such contracts shall not be cancelled. They are, however, eligible for rollover, on maturity.

f) In case of contracted exposures, forward contracts, involving Rupee as one of the currencies, in respect of all current account transactions as well as capital account transactions with a residual maturity of one year or less may be freely cancelled and rebooked.

g) In case of forward contracts involving Rupee as one of the currencies, booked by residents in respect of all hedge transactions, if cancelled with one AD Category I bank can be rebooked with another AD Category I bank subject to the following conditions:

(i) the switch is warranted by competitive rates on offer, termination of banking relationship with the AD Category I bank with whom the contract was originally booked;

(ii) the cancellation and rebooking are done simultaneously on the maturity date of the contract; and

(iii) the responsibility of ensuring that the original contract has been cancelled rests with the AD Category I bank who undertakes rebooking of the contract.

h) Forward contracts can be rebooked on cancellation subject to condition (i) below.

i) The facility of rebooking should not be permitted unless the corporate has submitted the exposure information as prescribed in Annex V.

j) Substitution of contracts for hedging trade transactions may be permitted by an AD Category I bank on being satisfied with the circumstances under which such substitution has become necessary. The AD Category I bank may also verify the amount and tenor of the underlying substituted.

ii) Cross Currency Options (not involving Rupee)

Participants

Market-makers – AD Category I banks as approved for this purpose by the Reserve Bank

Users – Persons resident in India

Purpose

a) To hedge exchange rate risk arising out of trade transactions.

b) To hedge the contingent foreign exchange exposure arising out of submission of a tender bid in foreign exchange.

Operational Guidelines, Terms and Conditions

  1. AD Category I banks can only offer plain vanilla European options1.
  2. Customers can buy call or put options.
  3. These transactions may be freely booked and/ or cancelled subject to verification of the underlying.
  4. All guidelines applicable for cross currency forward contracts are applicable to cross currency option contracts also.
  5. Cross currency options should be written by AD Category I banks on a fully covered back-to-back basis. The cover transaction may be undertaken with a bank outside India, an Off-shore Banking Unit situated in a Special Economic Zone or an internationally recognized option exchange or another AD Category I bank in India. AD Category I banks desirous of writing options, should obtain a one-time approval from the Chief General Manager, Financial Markets Regulation Department, Reserve Bank of India, Central Office, 1st Floor, Main Building, Shahid Bhagat Singh Road, Fort, Mumbai – 400 001, before undertaking the business.

iii) Foreign Currency – INR Options

Participants

Market-makers – AD Category I banks, as approved for this purpose by the Reserve Bank.

Users – Persons resident in India

Purpose

a) To hedge foreign currency exposures in accordance with Schedule I of Notification No. FEMA 25/2000-RB dated May 3, 2000, as amended from time to time.

b) To hedge the contingent foreign exchange exposure arising out of submission of a tender bid in foreign exchange.

Operational Guidelines, Terms and Conditions

a) AD Category I banks having a minimum CRAR of 9 per cent, can offer foreign currency– INR options on a back-to-back basis.

b) For the present, AD category I banks can offer only plain vanilla European options.

c) Customers can buy call or put options.

d) All guidelines applicable for foreign currency-INR foreign exchange forward contracts are applicable to foreign currency-INR option contracts also.

e) AD Category I banks having adequate internal control, risk monitoring/ management systems, mark to market mechanism, etc. are permitted to run a foreign currency– INR options book on prior approval from the Reserve Bank, subject to conditions. AD Category I banks desirous of running a foreign currency-INR options book and fulfilling minimum eligibility criteria listed below, may apply to the Reserve Bank with copies of approval from the competent authority (Board/ Risk Committee/ ALCO), detailed memorandum in this regard, specific approval of the Board for the type of option writing and permissible limits. The memorandum put up to the Board should clearly mention the downside risks, among other matters.

Minimum Eligibility Criteria:

  1. Net worth not less than Rs 300 crore
  2. CRAR of 10 per cent
  3. Net NPAs not exceeding 3 per cent of the net advances
  4. Continuous profitability for at least three years

The Reserve Bank will consider the application and accord a one-time approval at its discretion. AD Category I banks are expected to manage the option portfolio within the Reserve Bank approved risk management limits.

f) AD banks may quote the option premium in Rupees or as a percentage of the Rupee/foreign currency notional.

g) Option contracts may be settled on maturity either by delivery on spot basis or by net cash settlement in Rupees on spot basis as specified in the contract. In case of unwinding of a transaction prior to the maturity, the contract may be cash settled based on market value of an identical off-setting option.

h) Market makers are allowed to hedge the ‘Delta’ of their option portfolio by accessing the spot and forward markets. Other ‘Greeks’ may be hedged by entering into option transactions in the inter-bank market.

i) The ‘Delta’ of the option contract would form part of the overnight open position.

j) The ‘Delta’ equivalent as at the end of each maturity shall be taken into account for the purpose of AGL. The residual maturity (life) of each outstanding option contract can be taken as the basis for the purpose of grouping under various maturity buckets.

k) AD banks running an option book are permitted to initiate plain vanilla cross currency option positions to cover risks arising out of market making in foreign currency-INR options.

l) Banks should put in place necessary systems for marking to market the portfolio on a daily basis. FEDAI will publish daily a matrix of polled implied volatility estimates, which market participants can use for marking to market their portfolio.

m) The accounting framework for option contracts will be as per FEDAI circular No.SPL-24/FC-Rupee Options/2003 dated May 29, 2003.

iv) Foreign Currency-INR Swaps

Participants

Market-makers – AD Category I banks in India. For2 entering into swaps with Multilateral (MFI) or International Financial Institutions (IFIs) in which Government of India is a shareholder, refer to para. (g) under operational guidelines, terms and conditions.

Users –

i. Residents having a foreign currency liability and undertaking a foreign currency-INR swap to move from a foreign currency liability to a Rupee liability.

ii. Incorporated resident entities having a rupee liability and undertaking an INR – foreign currency swap (INR-FCY) to move from rupee liability to a foreign currency liability, subject to certain minimum prudential requirements, such as risk management systems and natural hedges or economic exposures. In the absence of natural hedges or economic exposures, the INR-foreign currency swap (to move from rupee liability to a foreign currency liability) may be restricted to listed companies or unlisted companies with a minimum net worth of Rs 200 crore. Further, the AD Category I bank is required to examine the suitability and appropriateness of the swap and be satisfied about the financial soundness of the corporate.

Purpose

To hedge exchange rate and/or interest rate risk exposure for those having long-term foreign currency borrowing or to transform long-term INR borrowing into foreign currency liability.

Operational Guidelines, Terms and Conditions

a) No swap transactions involving upfront payment of Rupees or its equivalent in any form shall be undertaken.

b) The term “long-term exposure” means exposures with residual maturity of one year or more.

c) The swap transactions, once cancelled, shall not be rebooked or re-entered, by whichever mechanism or by whatever name called. In3 case of FCY-INR swaps however, where the underlying is still surviving, the client, on cancellation of the swap contract, may be permitted to re‐enter into a fresh swap, to hedge the underlying but only after the expiry of the tenor of the original swap contract that had been cancelled. This flexibility is not permitted for INR-FCY swaps.

d) AD Category I banks should not offer leveraged swap structures. Typically, in leveraged swap structures, a multiplicative factor other than unity is attached to the benchmark rate(s), which alters the payables or receivables vis-à-vis the situation in the absence of such a factor.

e) The notional principal amount of the swap should not exceed the outstanding amount of the underlying loan.

f) The maturity of the swap should not exceed the remaining maturity of the underlying loan.

g) For hedging their long term foreign currency borrowings residents may enter in to FCY-INR swaps with Multilateral or International Financial Institutions (MFI/IFI) in which Government of India is a shareholding member subject to the following terms and conditions in addition to (a) to (f) above:

  1. Such swap transactions shall be undertaken by the MFI / IFI concerned on a back -to-back basis with an AD Category-I bank in India.
  2. AD Category – I banks shall face, for the purpose of the swap, only those Multilateral Financial Institutions (MFIs) and International Financial Institutions (IFIs) in which Government of India is a shareholding member.
  3. The FCY-INR swaps shall have a minimum tenor of three years.
  4. In the event of a default by the resident borrower on its swap obligations, the MFI / IFI concerned shall bring in foreign currency funds to meet its corresponding liabilities to the counterparty AD Cat-I bank in India.

v) Cost Reduction Structures i.e. cross currency option cost reduction structures and foreign currency –INR option cost reduction structures.

Participants

Market-makers – AD Category I banks

Users – Listed companies and their subsidiaries/joint ventures/associates having common treasury and consolidated balance sheet or unlisted companies with a minimum net worth of Rs. 200 crore

provided

  1. All such products are fair valued on each reporting date;
  2. The companies follow the Accounting Standards notified under section 211 of the Companies Act, 1956 and other applicable Guidance of the Institute of Chartered Accountants of India (ICAI) for such products/ contracts as also the principle of prudence which requires recognition of expected losses and non-recognition of unrealized gains;
  3. Disclosures are made in the financial statements as prescribed in ICAI press release dated 2nd December 2005; and
  4. The companies have a risk management policy with a specific clause in the policy that allows using the type/s of cost reduction structures.

(Note: The above accounting treatment is a transitional arrangement till AS 30 / 32 or equivalent standards are notified.)”

Purpose

To hedge exchange rate risk arising out of trade transactions, External Commercial Borrowings (ECBs) and foreign currency loans availed of domestically against FCNR (B) deposits.

Operational Guidelines, Terms and Conditions

  1. Writing of options by the users, on a standalone basis, is not permitted.
  2. Users can enter into option strategies of simultaneous buy and sell of plain vanilla European options, provided there is no net receipt of premium.
  3. Leveraged structures, digital options, barrier options, range accruals and any other exotic products are not permitted.
  4. The portion of the structure with the largest notional, computed over the tenor of the structure, should be reckoned for the purpose of underlying.
  5. The delta of the options should be explicitly indicated in the term sheet.
  6. AD Category I banks may, stipulate additional safeguards, such as, continuous profitability, higher net worth, turnover, etc depending on the scale of forex operations and risk profile of the users.
  7. The maturity of the hedge should not exceed the maturity of the underlying transaction and subject to the same the users may choose the tenor of the hedge. In case of trade transactions being the underlying, the tenor of the structure shall not exceed two years.
  8. The MTM position should be intimated to the users on a periodical basis.

vi) Hedging of Borrowings in foreign exchange, which are in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.

Products – Interest rate swap, Cross currency swap, Coupon swap, Cross currency option, Interest rate cap or collar (purchases), Forward rate agreement (FRA)

Participants

Market-makers –

a) AD Category I banks in India

b) Branch outside India of an Indian bank authorized to deal in foreign exchange in India

c) Offshore banking unit in a SEZ in India.

Users –

Persons resident in India who have borrowed foreign exchange in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.

Purpose

For hedging interest rate risk and currency risk on loan exposure and unwinding from such hedges.

Operational Guidelines, Terms and Conditions

  1. The products, as detailed above should not involve the rupee under any circumstances.
  2. Final approval has been accorded or Loan Registration Number allotted by the Reserve Bank for borrowing in foreign currency.
  3. The notional principal amount of the product should not exceed the outstanding amount of the foreign currency loan.
  4. The maturity of the product should not exceed the unexpired maturity of the underlying loan.
  5. The contracts may be cancelled and rebooked freely.

2) Probable exposures based on past performance

Participants

Market-makers – AD Category I banks in India.

Users – Importers and exporters of goods and services

Purpose

To hedge currency risk on the basis of a declaration of an exposure and based on past performance up to the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. Probable exposure based on past performance can be hedged only in respect of trades in merchandise goods as well as services.

Products

Forward foreign exchange contracts, cross currency options (not involving the rupee), foreign currency-INR options and cost reduction structures [as mentioned in section B para I 1(v)].

Operational Guidelines, Terms and Conditions

a) Corporates having a minimum net worth of Rs 200 crores and an annual export and import turnover exceeding Rs 1000 crores and satisfying all other conditions as stipulated in section B para I 1(v) may be allowed to use cost reduction structures.

b) The contracts booked during the current financial year (April-March) and the outstanding contracts at any point of time should not exceed

  1. The eligible limit i.e. the average of the previous three financial years’ actual export turnover or the previous year’s actual export turnover, whichever is higher for exports.
  2. Hundred percent of the eligible limit i.e. the average of the previous three financial years’ actual import turnover or the previous year’s actual import turnover, whichever is higher for imports. Importers, who have already booked contracts up to previous limit of fifty per cent in the current financial year, shall be eligible for difference arising out of the enhanced limit.

c) Contracts booked up to 75 percent of the eligible limit mentioned at paragraph (b) (i) and (b) (ii) above may be cancelled with the exporter/importer bearing/being entitled to the loss or gain as the case may be. Contracts booked in excess of 75 percent of the eligible limit mentioned at paragraph (b) (i) and (b) (ii) above shall be on a deliverable basis and cannot be cancelled, implying that in the event of cancellation, the exporter/importer shall have to bear the loss but will not be entitled to receive the gain.

d) These limits shall be computed separately for import/export transactions.

e) Higher limits will be permitted on a case-by-case basis on application to the Chief General Manager, Financial Markets Regulation Department, Reserve Bank of India, Central Office, 1st Floor, Main Building, Shahid Bhagat Singh Road, Fort, Mumbai – 400 001. The additional limits, if sanctioned, shall be on a deliverable basis.

f) Any contract booked without producing documentary evidence will be marked off against this limit. These contracts once cancelled, are not eligible to be rebooked. Rollovers are also not permitted.

g) AD banks should permit their clients to use the past performance facility only after satisfying themselves that the following conditions are complied with:

i. An undertaking may be taken from the customer that supporting documentary evidence will be produced before the maturity of all the contracts booked.

ii. Importers and exporters should furnish a quarterly declaration to the AD Category I banks, signed by the Chief Financial Officer (CFO) and the Company Secretary (CS), regarding amounts booked with other AD Category I banks under this facility, as per Annex VI. In the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) shall co-sign the undertaking along with the CFO.

iii. For an exporter customer to be eligible for this facility, the aggregate of overdue bills shall not exceed 10 per cent of the turnover.

iv. Aggregate outstanding contracts in excess of 50 per cent of the eligible limit may be permitted by the AD Category I bank on being satisfied about the genuine requirements of their customers after examination of a document as per the format in Annex VII, signed by the CFO and CS, containing the following:

  1. A declaration that all guidelines have been adhered to while utilizing this facility; and.
  2. A certificate of import/export turnover of the customer during the past three years.

In the absence of a CS, the CEO or the CFO shall co-sign the undertaking along with the CFO.

h) The past performance limits once utilised are not to be reinstated either on cancellation or on maturity of the contracts.

i) AD Category I banks must arrive at the past performance limits at the beginning of every financial year. The drawing up of the audited figures (previous year) may require some time at the commencement of the financial year. However, if the statements are not submitted within three months from the last date of the financial year, the facility should not be provided until submission of the audited figures.

j) As part of the annual audit exercise, the Statutory Auditor shall certify the following:

  1. The amounts booked with AD Category-I banks under this facility; and
  2. All guidelines have been adhered to while utilizing this facility over the past financial year.

k) AD Category I banks must institute appropriate systems for validating the past performance limits at pre-deal stage. In addition to the customer declarations, AD Category I banks should also assess the past transactions with the customers, turnover, etc.

l) AD Category I banks are required to submit a monthly report (as on the last Friday of every month) on the limits granted and utilised by their constituents under this facility as prescribed in Annex X.

3) Special Dispensation

i) Small and Medium Enterprises (SMEs)

Participants

Market-makers – AD Category I.

Users – Small and Medium Enterprises (SMEs)

Purpose

To hedge direct and / or indirect exposures of SMEs to foreign exchange risk

Product

Forward foreign exchange contracts

Operational Guidelines: Small and Medium Enterprises (SMEs) having direct and / or indirect exposures to foreign exchange risk are permitted to book / cancel / / roll over forward contracts without production of underlying documents to manage their exposures effectively, subject to the following conditions:

  1. Such contracts may be booked through AD Category I banks with whom the SMEs have credit facilities and the total forward contracts booked should be in alignment with the credit facilities availed by them for their foreign exchange requirements or their working capital requirements or capital expenditure.
  2. AD Category I bank should carry out due diligence regarding “user appropriateness” and “suitability” of the forward contracts to the SME customers as per Para 8.3 of ‘Comprehensive Guidelines on Derivatives’ issued vide DBOD.No.BP.BC. 44/21.04.157/2011-12 dated November 2, 2011.
  3. The SMEs availing this facility should furnish a declaration to the AD Category I bank regarding the amounts of forward contracts already booked, if any, with other AD Category I banks under this facility.

ii) Resident Individuals, Firms and Companies

Participants

Market-makers – AD Category I banks

Users: Resident Individuals, Firms and Companies

Purpose

To hedge their foreign exchange exposures arising out of actual or anticipated remittances, both inward and outward, can book forward contracts, without production of underlying documents, up to a limit of USD 1,000,000 (USD one million), based on self-declaration.

Product

Forward foreign exchange contracts and FCY-INR options

Operational Guidelines, Terms and Conditions

a) While the contracts booked under this facility would normally be on a deliverable basis, cancellation and rebooking of contracts are permitted. Based on the track record of the entity, the concerned AD Cat-I bank may, however, call for underlying documents, if considered necessary, at the time of rebooking of cancelled contracts. The notional value of the outstanding contracts should not exceed USD 1,000,000 at any time.

b) The contracts may be permitted to be booked up to tenors of one year only.

c) Such contracts may be booked through AD Category I banks with whom the resident individual / firm / company has banking relationship, on the basis of an application-cum-declaration in the format given in Annex XV. The AD Category I banks should satisfy themselves that the hedging entities understand the nature of risk inherent in booking of forward contracts or FCY-INR options and should carry out due diligence regarding “user appropriateness” and “suitability” of the forward contracts / FCY-INR options to such customer.

iii) Simplified Hedging Facility

Users: Resident and non-resident entities, other than individuals.

Purpose: To hedge exchange rate risk on transactions, contracted or anticipated, permissible under Foreign Exchange Management Act (FEMA), 19995.

Products: Any Over the Counter (OTC) derivative or Exchange Traded Currency Derivative (ETCD) permitted under FEMA, 1999.

Cap on Outstanding Contracts: USD 30 million, or its equivalent, on a gross basis.

Designated Bank: Any Authorised Dealer Category-I (AD Cat-I) bank designated as such by the user.

Operational Guidelines, Terms and Conditions

  1. The user shall appoint an AD Cat-I bank as its “Designated Bank”. The designated bank will assess the hedging requirement of the user and set a limit up to the stipulated cap on the outstanding contracts.
  2. If hedging requirement of the user exceeds the limit in course of time, the designated bank may re-assess and, at its discretion, extend the limit up to 150% of the stipulated cap.
  3. Hedge contracts in OTC market can be booked with any AD Cat-I bank, provided the underlying cash flow takes place with the same bank.
  4. Cost reduction structures can be booked by users provided that resident unlisted companies can use such structures only if they have a minimum net worth of Rs.200 crores
  5. Users are not required to furnish any documentary evidence for establishing underlying exposure under this facility. Users may, however, provide basic details of the underlying transaction in a standardised format6, only in the case of OTC hedge contracts.
  6. Cancelled contracts may be freely rebooked with the same bank.
  7. In case of hedge contracts booked in OTC market, while losses will be recovered from the user, net gains i.e. gains in excess of cumulative losses, if any, will be transferred at the time of delivery of the underlying cash flow. In case of part delivery, net gains will be transferred on a pro-rata basis.
  8. For hedge contracts on underlying capital account transactions, gains/losses may be transferred to the user as and when they accrue if the underlying asset/liability is already in existence.
  9. On full utilisation of the limit or in case of breach of limit, user shall not book new contracts under this facility. In such a case, contracts booked earlier under this facility will be allowed to continue till they expire or are closed. Any further hedging requirements thereafter may be booked under other available hedging facilities.
  10. Users booking contracts under this facility shall not book contracts under any other facility in OTC or ETCD market except as provided in para (ix).
  11. At the end of each financial year, the user will provide the designated bank with a statement signed by the head of finance or the head of the entity, to the effect that,
    1. Hedge contracts booked in both OTC and ETCD market, under this facility, are backed by underlying exchange rate exposures, either contracted or anticipated.
    2. The exposures underlying the hedge contracts booked under this facility are not hedged under any other facility.
  12. On being appointed, the designated bank shall report the details of the users and limits granted to the Trade Repository (TR). On a request by the TR, the exchanges shall report all contracts booked by such users to the TR on a daily basis.
  13. The TR will compute user wise outstanding position (across OTC and ETCD market) and provide this information to the designated bank for monitoring. If the outstanding contracts of a user exceeds the limit (or the extended limit, if applicable) the designated bank shall advise the user to stop booking new contracts under this facility.
  14. When user migrates to other available facilities, the designated bank shall report this information to the TR. The TR shall update this information in its records and notify the recognized stock exchanges to stop reporting data for the user concerned.
  15. Banks shall have an internal policy regarding the time limit up to which a hedge contract for a given underlying can be rolled-over or rebooked by the user.

 

B. General Instructions for OTC forex derivative contracts entered by Residents in India

While the guidelines indicated above govern specific foreign exchange derivatives, certain general principles and safeguards for prudential considerations that are applicable across the OTC foreign exchange derivatives, are detailed below. In addition to the guidelines under the specific foreign exchange derivative product, the general instructions should be followed scrupulously by the users (residents in India other than AD Category I banks) and the market makers (AD Category I banks). For Simplified Hedging Facility, para (a) and (b) below will not be applicable.

a) In case of all forex derivative transactions [except INR- foreign currency swaps i.e. moving from INR liability to foreign currency liability as in section B para I(1)(iv)] is undertaken, AD Category I banks must take a declaration from the clients that the exposure is unhedged and has not been hedged with another AD Category I bank. The corporates should provide an annual certificate to the AD Category I bank certifying that the derivative transactions are authorized and that the Board (or the equivalent forum in case of partnership or proprietary firms) is aware of the same.

b) In the case of contracted exposure, AD Category I banks must obtain:

i) An undertaking from the customer that the same underlying exposure has not been covered with any other AD Category I bank/s. Where hedging of the same exposure is undertaken in parts, with more than one AD Category I bank, the details of amounts already booked with other AD Category I bank/s should be clearly indicated in the declaration. This undertaking can also be obtained as a part of the deal confirmation.

ii) An annual certificate from the statutory auditors to the effect that the contracts outstanding with all AD category I banks at any time during the year did not exceed the value of the underlying exposures at that time. It is reiterated, however, that that the AD bank, while entering into any derivative transaction with a client, shall have to obtain an undertaking from the client to the effect that the contracted exposure against which the derivative transaction is being booked has not been used for any derivative transaction with any other AD bank.

c) Derived foreign exchange exposures are not permitted to be hedged. However, in case of INR- foreign currency swaps, at the inception, the user can enter into one time plain vanilla cross currency option (not involving Rupee) to cap the currency risk.

d) In any derivative contract, the notional amount should not exceed the actual underlying exposure at any point in time. Similarly, the tenor of the derivative contracts should not exceed the tenor of the underlying exposure. The notional amount for the entire transaction over its complete tenor must be calculated and the underlying exposure being hedged must be commensurate with the notional amount of the derivative contract.

e) Only one hedge transaction can be booked against a particular exposure/ part thereof for a given time period.

f) The term sheet for the derivative transactions (except forward contracts) should also necessarily and clearly mention the following:

  1. the purpose for the transaction detailing how the product and each of its components help the client in hedging;
  2. the spot rate prevailing at the time of executing the transaction; and
  3. quantified maximum loss/ worst downside in various scenarios.

g) AD Category I banks can offer only those products that they can price independently. This is also applicable to the products offered even on back to back basis. The pricing of all forex derivative products should be locally demonstrable at all times.

h) The market-makers should carry out proper due diligence regarding ‘user appropriateness’ and ‘suitability’ of products before offering derivative products (except forward contracts) to users as detailed in. No.BP.BC. 44 /21.04.157/2011-12 dated November 2, 2011.

i) AD Category I may share with the user the various scenario analysis encompassing both the possible upside as well as the downsides and sensitivity analysis identifying the various market parameters that affect the product.

j) The provisions of comprehensive guidelines on Derivatives issued vide DBOD.No.BP.BC. 86/21.04.157/2006-07 dated April 20, 2007 and as amended from time to time are also applicable to forex derivatives.

k) Sharing of information on derivatives between banks is mandatory and as detailed vide circular DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 and DBOD.No. BP. BC. 94/08.12.001/2008-09 dated December 8, 2008.

4. Currency Futures on recognised Stock /New Exchanges

As part of further developing the derivatives market in India and adding to the existing menu of foreign exchange hedging tools available to the residents and non-residents, currency futures contracts have been permitted to be traded in recognized stock exchanges or new exchanges, recognized by the Securities and Exchange Board of India (SEBI) in the country. The currency futures market would function subject to the directions, guidelines, instructions issued by the Reserve Bank and the SEBI, from time to time.

Participation in the currency futures market in India is subject to directions contained in the Currency Futures (Reserve Bank) Directions, 2008 [Notification No.FED.1/DG(SG)-2008 dated August 6, 2008] (Directions) and Notification No.FED. 2/ED (HRK)-2009 dated January 19, 2010, as amended7 from time to time, issued by the Reserve Bank of India under Section 45W of the Reserve Bank of India Act, 1934.

Currency futures are subject to following conditions:

Permission

(i) Currency futures are permitted in US Dollar (USD) – Indian Rupee (INR), Euro (EUR)-INR, Japanese Yen (JPY)-INR, Pound Sterling (GBP)-INR, EUR-USD, GBP-USD and USD-JPY.

(ii) ‘Persons resident in India’ may purchase or sell currency futures contracts subject to the terms and conditions laid down in paragraph 6 below.

(iii) Foreign Portfolio Investors (FPIs) are permitted to enter into currency futures contracts subject to the terms and conditions laid down in Part A, Section II, paragraph no. 2.

Features of currency futures

Standardized currency futures shall have the following features:

a. Foreign Currency-Indian Rupee contracts, viz. USD-INR, EUR-INR, GBP-INR and JPY-INR and Cross Currency contracts (not involving the Indian Rupee), viz. EUR-USD, GBP-USD and USD-JPY are allowed to be traded.

b. The size of the USD-INR and USD-JPY contracts shall be USD 1000, of EUR-INR and EUR-USD contracts shall be EUR 1000, of GBP-INR and GBP-USD contracts shall be GBP 1000 and JPY-INR contract shall be JPY 100,000.

c. All Foreign Currency-INR contracts shall be quoted and settled in Indian Rupees. EUR-USD and GBP-USD cross currency contracts shall be quoted in USD and USD-JPY contract shall be quoted in JPY. All cross currency contracts shall be settled in Indian Rupees as per the method approved by Reserve Bank.

d. The maturity of the contracts shall not exceed 12 months.

e. The settlement price for USD-INR shall be the Reserve Bank’s Reference Rate and for Euro-INR, GBP-INR and JPY-INR contracts shall be the exchange rates published by the Reserve Bank in its press release on the last trading day. The settlement price in Indian Rupees of the cross-currency contracts shall be computed using the Reserve Bank’s USD-INR Reference Rate and the corresponding exchange rate published by Reserve Bank for EUR-INR, GBPINR and JPY-INR on the last trading day.

Membership

(i) The membership of the currency futures market of a recognised stock exchange shall be separate from the membership of the equity derivative segment or the cash segment. Membership for both trading and clearing, in the currency futures market shall be subject to the guidelines issued by the SEBI.

(ii) Banks authorized by the Reserve Bank under section 10 of the Foreign Exchange Management Act, 1999 as ‘AD Category – I bank’ are permitted to become trading and clearing members of the currency futures market of the recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfilling the minimum prudential requirements.

(iii) AD Category – I banks which do not meet the above minimum prudential requirements and AD Category – I banks which are Urban Co-operative banks or State Co-operative banks can participate in the currency futures market only as clients, subject to approval therefore from the respective regulatory Departments of the Reserve Bank.

Position limits

i. The position limits for various classes of participants in the currency futures market shall be subject to the guidelines issued by the SEBI.

ii. The AD Category – I banks, shall operate within prudential limits, such as Net Open Position (NOP) and Aggregate Gap (AG) limits.

Risk Management measures

The trading of currency futures shall be subject to maintaining initial, extreme loss and calendar spread margins and the Clearing Corporations / Clearing Houses of the exchanges should ensure maintenance of such margins by the participants on the basis of the guidelines issued by the SEBI from time to time.

Surveillance and disclosures

The surveillance and disclosures of transactions in the currency futures market shall be carried out in accordance with the guidelines issued by the SEBI.

Authorisation to Currency Futures Exchanges / Clearing Corporations

Recognized stock exchanges and their respective Clearing Corporations / Clearing Houses shall not deal in or otherwise undertake the business relating to currency futures unless they hold an authorization issued by the Reserve Bank under section 10(1) of the Foreign Exchange Management Act, 1999.

5. Currency Options on recognised Stock /New Exchanges

In order to expand the existing menu of exchange traded hedging tools available to the residents and non-residents, plain vanilla currency options contracts have been permitted to be traded in recognized stock exchanges or new exchanges, recognized by the Securities and Exchange Board of India (SEBI) in the country.

Exchange traded Currency options are subject to following conditions:

Permission

(i) Currency option contracts8 are permitted in USD-INR spot rate, EUR-INR spot rate GBP-INR spot rate and JPY-INR spot rate. Cross currency option contracts (not involving the Indian Rupee) are permitted in EUR-USD spot rate, GBP-USD spot rate and the USD-JPY spot rate.

(ii) ‘Persons resident in India’ may purchase or sell exchange traded currency options contracts subject to the terms and conditions laid down in paragraph 6 below.

(iii) Foreign Portfolio Investors (FPIs) are permitted to enter into exchange traded currency options contracts subject to the terms and conditions laid down in Part A, Section II, paragraph no. 2.

Features of exchange traded currency options

Standardized exchange traded currency options shall have the following features:

  1. The underlying for the currency option shall be the spot rate of the corresponding permitted currency pair.
  2. The options shall be premium styled European call and put options.
  3. The size of the USD-INR and USD-JPY contracts shall be USD 1000, of EUR-INR and EUR-USD contracts shall be EUR 1000, of GBP-INR and GBPUSD contracts shall be GBP 1000 and JPY-INR contract shall be JPY 100,000.
  4. The premium for all contracts involving the Indian Rupee shall be quoted in Indian Rupees. The premium for EUR-USD and GBP-USD contracts shall be quoted in USD and for USD-JPY contract shall be quoted in JPY. For cross currency contracts the premium shall be payable in Indian Rupees based on the USD-INR Reference Rate or the corresponding exchange rates published by Reserve Bank. The outstanding position shall be in USD for USD-INR and USD-JPY contracts, in Euro for EUR-INR and EUR-USD contracts and in GBP for GBP-INR and GBP-USD contracts.
  5. The maturity of the contracts shall not exceed twelve months.
  6. The contracts shall be settled in cash in Indian Rupees.
  7. The settlement price for USD-INR option contract shall be the Reserve Bank’s Reference Rate and for Euro-INR, GBP-INR and JPY-INR contracts shall be the exchange rates published by the Reserve Bank in its press release on the expiry date of the contract. The settlement price in Indian Rupees of the cross-currency contracts shall be computed using the Reserve Bank’s USD-INR Reference Rate and the corresponding exchange rate published by Reserve Bank for EUR-INR, GBP-INR and JPYINR on the expiry date of the contract.

Membership

i) Members registered with the SEBI for trading in currency futures market shall be eligible to trade in the exchange traded currency options market of a recognised stock exchange. Membership for both trading and clearing, in the exchange traded currency options market shall be subject to the guidelines issued by the SEBI.

ii) Banks authorized by the Reserve Bank under section 10 of the Foreign Exchange Management Act, 1999 as ‘AD Category – I bank’ are permitted to become trading and clearing members of the exchange traded currency options market of the recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:

  1. Minimum net worth of Rs. 500 crores.
  2. Minimum CRAR of 10 per cent.
  3. Net NPA should not exceed 3 per cent.
  4. Made net profit for last 3 years.

The AD Category – I banks, which fulfil the prudential requirements, should lay down detailed guidelines with the approval of their Boards for trading and clearing of the exchange traded currency options contracts and management of risks.

iii) AD Category – I banks, which do not meet the above minimum prudential requirements and AD Category – I banks, which are Urban Co-operative banks or State Co-operative banks, can participate in the exchange traded currency options market only as clients, subject to approval therefor from the respective regulatory Departments of the Reserve Bank.

Position limits

i) The position limits for various classes of participants for the currency options shall be subject to the guidelines issued by the SEBI.

ii) The AD Category – I banks shall operate within prudential limits, such as Net Open Position (NOP) and Aggregate Gap (AG) limits.

Risk Management measures

The trading of exchange traded currency options shall be subject to maintaining initial, extreme loss and calendar spread margins and the Clearing Corporations / Clearing Houses of the exchanges should ensure maintenance of such margins by the participants on the basis of the guidelines issued by the SEBI from time to time.

Surveillance and disclosures

The surveillance and disclosures of transactions, in the exchange traded currency options market, shall be carried out in accordance with the guidelines issued by the SEBI.

Authorisation to the Exchanges / the Clearing Corporations for dealing in Currency Options

Recognized stock exchanges and their respective Clearing Corporations / Clearing Houses shall not deal in or otherwise undertake the business relating to the exchange traded currency options unless they hold an authorisation issued by the Reserve Bank under section 10 (1) of the Foreign Exchange Management Act, 1999.

6. Terms and conditions for residents participating in the Exchange Traded Currency Derivatives (ETCD)

a. Persons resident in India may take positions (long or short), without having to establish existence of underlying exposure, upto a single limit of USD 100 million equivalent across all currency pairs involving INR, put together, and combined across all exchanges.

b. Residents shall be allowed to take positions in the cross-currency futures and exchange traded cross-currency option contracts without having to establish underlying exposure subject to the position limits as prescribed by the exchanges.

c. Domestic participants who want to take a position in excess of limits mentioned at paragraph (a) above in the ETCD market will have to establish the existence of an underlying exposure. The procedure for the same shall be as under:

  1. For participants who are exporters or importers of goods and services, the eligible limit up to which they can take appropriate hedging positions in ETCDs will be determined as higher of the (I) average of the last three years’ export or import turnover, or (II) previous year’s export or import turnover.
  2. The participants shall furnish, to the trading member of the exchange, a certificate(s) from their statutory auditors regarding the limit(s) mentioned above along with an undertaking signed by the Chief Financial Officer (CFO) to the effect that at all time, the sum total of the outstanding OTC derivative contracts and the outstanding ETCD contracts shall be corresponding to the actual exports or imports contracted, as the case may be.
  3. Based on the above certificate, a trading member can book ETCD contracts upto fifty per cent of the eligible limit [as at paragraph (i) above] on behalf of the concerned customer. If a participant wishes to take position beyond the fifty per cent of the eligible limit in the ETCD, it has to produce a signed undertaking from the Chief Financial Officer (CFO) or the senior most functionary responsible for company’s finance and accounts and the Company Secretary (CS) to the effect that the sum total of the outstanding OTC derivative contracts and outstanding ETCD contracts has been in correspondence with the eligible limits. In the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) shall co-sign the undertaking along with the CFO or the senior most functionary responsible for company’s finance and accounts. Based on such an undertaking, the trading member can book ETCD contracts beyond fifty per cent of the limit and up to limit mentioned in paragraph (i) above.
  4. For all other participants having an underlying foreign currency exposure in respect of both current and capital account transactions as also exporters and importers who wish to access the ETCD market on the basis of contracted exposure, they will have to undertake the transaction through AD Category-I bank/s who are operating as trading members. In such cases, the responsibility for verification of the underlying exposures and ensuring that the ETCD bought/sold is in conformity with the underlying exposure and that no OTC contract has been booked against the same underlying exposure shall rest with the concerned (AD Category I bank) trading member.
  5. All participants in the ETCD market, except those covered by paragraph (iv) above, will be required to submit to the concerned trading member of the exchange a half-yearly signed undertaking from the Chief Financial Officer (CFO) or the senior most functionary responsible for company’s finance and accounts and the Company Secretary (CS) to the effect that the sum total of the outstanding OTC derivative contracts and outstanding ETCD contracts has been in correspondence with the eligible limits. In the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) shall co-sign the undertaking along with the CFO or the senior most functionary responsible for company’s finance and accounts.

d. The onus of complying with the provisions of this circular rests with the participant in the ETCD market and in case of any contravention the participant shall be liable to any action that may be warranted as per the provisions of Foreign Exchange Management Act, 1999 and the regulations, directions, etc. issued thereunder. The position limits shall also be monitored by the exchanges, and breaches, if any, may be reported to the Financial Markets Regulation Department, Reserve Bank of India.

7. Commodity Hedging

Refer Hedging of Commodity Price Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions (RBI/2017-18/138 A.P. (DIR Series) Circular No. 19 dated March 12, 2018).

8. Freight hedging

Refer Hedging of Commodity Price Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions (RBI/2017-18/138 A.P. (DIR Series) Circular No. 19 dated March 12, 2018).

 

(B) Facilities for Persons Resident outside India

Participants

Market-makers – AD Category I banks.

Users –Foreign Portfolio Investors(FPIs), Investors having Foreign Direct Investments (FDI), Non Resident Indians (NRIs), Non Resident exporters and importers, Non Residents lenders having ECBs designated in INR.

The purpose, products and operational guidelines of each of the users is detailed below:

1. Facilities for Foreign Portfolio Investors (FPIs)

Purpose

i) To hedge currency risk on the market value of entire investment in equity and/or debt in India as on a particular date.

ii) To hedge the coupon receipts arising out of investments in debt securities falling due during the following twelve months.

iii) To hedge Initial Public Offers (IPO) related transient capital flows under the Application Supported by Blocked Amount (ASBA) mechanism.

Products

Forward foreign exchange contracts with rupee as one of the currencies and foreign currency-INR options. Foreign Currency – INR swaps for IPO related flows.

Operational Guidelines, Terms and Conditions

a) FPIs may approach any AD Category I bank for hedging their currency risk on the market value of entire investment in equity and/or debt in India as on a particular date subject to the following conditions:

i. The eligibility for cover may be determined on the basis of a valuation certificate provided by the designated AD category bank along with a declaration by the FPI to the effect that its global outstanding hedges plus the derivatives contracts cancelled across all AD category banks is within the market value of its investments.

ii. The FPI should also provide a quarterly declaration to the custodian bank that the total amount of derivatives contract booked across AD Category banks are within the market value of its investments.

iii. The hedges taken with AD banks other than designated AD banks have to be settled through the Special Non-Resident Rupee A/c maintained with the designated bank through RTGS/NEFT.

iv. If an FPI wishes to enter into a hedge contract for the exposure relating to that part of the securities held by it against which it has issued any PN/ODI, it must have a mandate from the PN/ODI holder for the purpose. Further, while AD Category bank is expected to verify such mandates, in cases where this is rendered difficult, they may obtain a declaration from the FPI regarding the nature/structure of the PN/ODI establishing the need for a hedge operation and that such operations are being undertaken against specific mandates obtained from their clients.

b) AD Category I banks may undertake periodic reviews, at least at quarterly intervals, on the basis of market price movements, fresh inflows, amounts repatriated and other relevant parameters to ensure that the forward cover outstanding is supported by underlying exposures. In this context, it is clarified that in case an FPI intends to hedge the exposure of one of its sub-account holders, (cf paragraph 4 of schedule 2 to Notification No. FEMA 20 /2000-RB dated 3rd May 2000) it will be required to produce a clear mandate from the sub-account holder in respect of the latter’s intention to enter into the derivative transaction. Further, the AD Category I banks shall have to verify the mandate as well as the eligibility of the contract vis-a-vis the market value of the securities held in the concerned sub-account.

c) If a hedge becomes naked in part or in full owing to contraction of the market value of the portfolio, for reasons other than sale of securities, the hedge may be allowed to continue till the original maturity, if so desired.

d) Forward contracts booked by FPIs, once cancelled, can be rebooked up to the extent of 10 per cent of the value of the contracts cancelled. The forward contracts booked may, however, be rolled over on or before maturity.

e) Forward contracts booked for hedging coupon receipts as indicated in para. (1)(ii) above shall not be eligible for rebooking on cancellation. They may however be rolled over on maturity provided the relative coupon amount is yet to be received.

f) The cost of hedge should be met out of repatriable funds and /or inward remittance through normal banking channel.

g) All outward remittances incidental to the hedge are net of applicable taxes.

h) For IPO related transient capital flows

  1. FPIs can undertake foreign currency- rupee swaps only for hedging the flows relating to the IPO under the ASBA mechanism.
  2. The amount of the swap should not exceed the amount proposed to be invested in the IPO.
  3. The tenor of the swap should not exceed 30 days.
  4. The contracts, once cancelled, cannot be rebooked. Rollovers under this scheme will also not be permitted.

i) FPIs and other foreign investor are free to remit funds through any bank of its choice for any transaction permitted under FEMA, 1999 or the Regulations / Directions framed thereunder. The funds thus remitted can be transferred to the designated AD Category -I custodian bank through the banking channel. Note should, however, be taken that KYC in respect of the remitter, wherever required, is a joint responsibility of the bank that has received the remittance as well as the bank that ultimately receives the proceeds of the remittance. While the first bank will be privy to the details of the remitter and the purpose of the remittance, the second bank, will have access to complete information from the recipient’s perspective. Besides, the remittance receiving bank is required to issue FIRC to the bank receiving the proceeds to establish the fact the funds had been remitted in foreign currency.

2. Terms and conditions for Foreign Portfolio Investors participating in the Exchange Traded Currency Derivatives (ETCD) [Refer Part A, sub-paragraphs (4) & (5)]

Foreign portfolio investors (FPIs) eligible to invest in securities as laid down in Schedules 2, 5, 7 and 8 of the Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000 (FEMA 20/2000-RB dated May 3, 2000 (GSR 406 (E) dated May 3, 2000)) as amended from time to time may enter into currency futures or exchange traded currency options contracts subject to the following terms and conditions:

a. FPIs will be allowed access to the currency futures or exchange traded currency options for the purpose of hedging the currency risk arising out of the market value of their exposure to Indian debt and equity securities.

b. Such investors can participate in the currency futures / exchange traded options market through any registered / recognised trading member of the exchange concerned.

c. FPIs may take positions (long or short), without having to establish existence of underlying exposure, upto a single limit of USD 100 million equivalent across all currency pairs involving INR, put together, and combined across all exchanges.

d. FPIs, are allowed to take positions in the cross-currency futures and exchange traded cross-currency option contracts without having to establish underlying exposure subject to the position limits as prescribed by the exchanges.

e. An FPI cannot take a short position beyond USD 100 million equivalent across all currency pairs involving INR, put together, and combined across all exchanges. In order to take a long position in excess of these limits, it will be required to have an underlying exposure. The onus of ensuring the existence of an underlying exposure shall rest with the FPI concerned.

f. The exchange will, however, be free to impose additional restrictions as prescribed by the Securities and Exchange Board of India (SEBI) for the purpose of risk management and fair trading.

g. The exchange/ clearing corporation will provide FPI wise information on day-end open position as well as intra-day highest position to the respective custodian banks. The custodian banks will aggregate the position of each FPI on the exchanges as well as the OTC contracts booked with them (i.e. the custodian banks) and other AD banks. If the total value of the contracts exceeds the market value of the holdings on any day, the concerned FPI shall be liable to such penal action as may be laid down by the SEBI in this regard and action as may be taken by Reserve Bank of India under the Foreign Exchange Management Act (FEMA), 1999. The designated custodian bank will be required to monitor this and bring transgressions, if any, to the notice of RBI / SEBI.

h. The onus of complying with the provisions of this circular rests with the participant in the ETCD market and in case of any contravention the participant shall be liable to any action that may be warranted as per the provisions of Foreign Exchange Management Act, 1999 and the regulations, directions, etc. issued thereunder. The position limits shall also be monitored by the exchanges, and breaches, if any, may be reported to the Financial Markets Regulation Department, Reserve Bank of India.

 

3. Facilities for Non-resident Indians (NRIs)

Purpose

  1. To hedge the exchange rate risk on the market value of investment made under the portfolio scheme in accordance with provisions of FERA, 1973 or under notifications issued there under or in accordance with provisions of FEMA, 1999. For access to ETCD market, see para. 4 below.
  2. To hedge the exchange rate risk on the amount of dividend due on shares held in Indian companies.
  3. To hedge the exchange rate risk on the amounts held in FCNR (B) deposits.
  4. To hedge the exchange rate risk on balances held in NRE account.

Products

  1. Forward foreign exchange contracts with rupee as one of the currencies, and foreign currency-INR options.
  2. Additionally, for balances in FCNR (B) accounts – Cross currency (not involving the rupee) forward contracts to convert the balances in one foreign currency to other foreign currencies in which FCNR (B) deposits are permitted to be maintained.

4. Terms and conditions for Non-Resident Indians (NRIs) participating in the Exchange Traded Currency Derivatives (ETCD)

i. NRIs shall designate an AD Cat-I bank for the purpose of monitoring and reporting their combined positions in the OTC and ETCD segments.

ii. NRIs may take positions in the currency futures / exchange traded options market to hedge the currency risk on the market value of their permissible (under FEMA, 1999) Rupee investments in debt and equity and dividend due and balances held in NRE accounts.

iii. The exchange/ clearing corporation will provide details of all transactions of the NRI to the designated bank.

iv. The designated bank will consolidate the positions of the NRI on the exchanges as well as the OTC derivative contracts booked with them and with other AD banks. The designated bank shall monitor the aggregate positions and ensure the existence of underlying Rupee currency risk and bring transgressions, if any, to the notice of RBI / SEBI.

v. The onus of ensuring the existence of the underlying exposure shall rest with the NRI concerned. If the magnitude of exposure through the hedge transactions exceeds the magnitude of underlying exposure, the concerned NRI shall be liable to such penal action as may be taken by Reserve Bank of India under the Foreign Exchange Management Act (FEMA), 1999.

5. Facilities for Hedging Foreign Direct Investment in India

Purpose

  1. To hedge exchange rate risk on the market value of investments made in India since January 1, 1993, subject to verification of the exposure in India
  2. To hedge exchange rate risk on dividend receivable on the investments in Indian companies
  3. To hedge exchange rate risk on proposed investment in India

Products

Forward foreign exchange contracts with rupee as one of the currencies and foreign currency-INR options.

Operational Guidelines, Terms and Conditions

a) In respect of contracts to hedge exchange rate risk on the market value of investments made in India, contracts once cancelled are not eligible to be rebooked. The contracts may, however, be rolled over.

b) In respect of proposed foreign direct investments, following conditions would apply:

  1. Contracts to hedge exchange rate risk arising out of proposed investment in Indian companies may be allowed to be booked only after ensuring that the overseas entities have completed all the necessary formalities and obtained necessary approvals (wherever applicable) for the investment.
  2. The tenor of the contracts should not exceed six months at a time beyond which permission of the Reserve Bank would be required to continue with the contract.
  3. These contracts, if cancelled, shall not be eligible to be rebooked for the same inflows.
  4. Exchange gains, if any, on cancellation shall not be passed on to the overseas investor.

6. Facilities for Hedging Trade Exposures, invoiced in Indian Rupees in India

Purpose

To hedge the currency risk arising out of genuine trade transactions involving exports from and imports to India, invoiced in Indian Rupees, with AD Category I banks in India.

Products

Forward foreign exchange contracts with rupee as one of the currencies, foreign currency-INR options.

Operational Guidelines, Terms and Conditions

The AD Category I banks can opt for either Model I or Model II as given in RBI Direction.

7. Facilities for Hedging of ECBs, designated in Indian Rupees, in India

I) Purpose: To hedge the currency risk arising out of ECBs designated in INR either directly with AD Category- I banks in India or through their overseas banks on a back to back basis as per operational guidelines, terms and conditions given under (II) below

Products

Forward foreign exchange contracts with rupee as one of the currencies, foreign currency-INR options and foreign currency-INR swaps.

Operational Guidelines, Terms and Conditions

i. The foreign equity holder / overseas organisation or individual approaches the AD bank in India with a request for forward cover in respect of underlying transaction for which he needs to furnish appropriate documentation (scanned copies would be acceptable), on a pre-deal basis to enable the AD bank in India to satisfy itself that there is an underlying ECB transaction, and details of his overseas banker, address, etc. The following undertakings also need to be taken from the customer –

  1. That the same underlying exposure has not been hedged with any other AD Category- I bank/s in India.
  2. If the underlying exposure is cancelled, the customer will cancel the hedge contract immediately.

ii. The amount and tenor of the hedge should not exceed that of the underlying transaction and should be in consonance with the extant regulations regarding tenor of payment / realization of the proceeds.

iii. On due date, settlement is to be done through the correspondent bank’s Vostro or the AD bank’s Nostro accounts. AD banks in India may release funds to the beneficiaries only after sighting funds in Nostro / Vostro accounts.

iv. The contracts, once cancelled, cannot be rebooked.

v. The contracts may, however, be rolled over on or before maturity subject to maturity of the underlying exposure.

vi. On cancellation of the contracts, gains may be passed on to the customer subject to the customer providing a declaration that he is not going to rebook the contract or that the contract has been cancelled on account of cancellation of the underlying exposure.

II) Purpose: To hedge the currency risk arising out of ECBs designated in INR extended by recognised non-resident lenders with AD Category- I banks in India through their overseas banks on a back to back basis.

Products: Foreign currency-INR swaps

Operational Guidelines, Terms and Conditions

(i) The recognised non-resident lender approaches his overseas bank with appropriate documentation as evidence of an underlying ECB denominated in INR with a request for a swap rate for mobilising INR for onward lending to the Indian borrower.

(ii) The overseas bank, in turn, approaches an AD Cat-I bank for a swap rate along with documentation furnished by the customer that will enable the AD bank in India to satisfy itself that there is an underlying ECB in INR (scanned copies would be acceptable). The following undertakings also need to be taken from the customer –

  1. That the same underlying exposure has not been hedged with any other AD Category- I bank/s in India.
  2. If the underlying exposure is cancelled, the customer will cancel the hedge contract immediately.

(iii) A KYC certification on the end client shall also be taken by the AD bank in India as a one-time document from the overseas bank.

(iv) Based on the documents received from the overseas bank, the AD bank in India should satisfy itself about the existence of the underlying ECB in INR and offer an indicative swap rate to the overseas bank which, in turn, will offer the same to the non-resident lender on a back-to-back basis.

(v) The continuation of the swap shall be subject to the existence of the underlying ECB at all times.

(vi) On the due date, settlement may be done through the Vostro account of the overseas bank maintained with its correspondent bank in India.

(vii) The concerned AD Cat-I bank shall keep on record all related documentation for verification by Reserve Bank.

8. Facility for hedging exposures of Indian subsidiaries

Users

Non-resident parent of an Indian subsidiary or its centralised treasury or its regional treasury outside India.

Products

All FCY-INR derivatives, OTC as well exchange traded that the Indian subsidiary is eligible to undertake as per FEMA, 1999 and Regulations and Directions issued thereunder.

Operational Guidelines, Terms and Conditions

  1. The transactions under this facility will be covered under a tri-partite agreement involving the Indian subsidiary, its non-resident parent / treasury and the AD bank. This agreement will include the exact relationship of the Indian subsidiary or entity with its overseas related entity, relative roles and responsibilities of the parties and the procedure for the transactions, including settlement. The ISDA agreement between the AD bank and the non-resident entity will be distinct from this agreement.
  2. The non-resident entity should be incorporated in a country that is member of the Financial Action Task Force (FATF) or member of a FATF-Style Regional body.
  3. The AD Bank may obtain KYC/ AML certification on the lines of the format in Annex XVIII of the Master Direction on Risk Management and Inter Bank Dealings, as amended from time to time.
  4. The non-resident entity may approach an AD Cat-I bank directly which handles the foreign exchange transactions of its subsidiary for booking derivative contracts to hedge the currency risk of and on the latter’s behalf.
  5. The non-resident entity may contract any product either under the contracted route or on past performance basis, which the Indian subsidiary is eligible to use.
  6. The Indian subsidiary shall be responsible for compliance with the rules, regulations and directions issued under FEMA 1999 and any other laws/rules/regulations applicable to these transactions in India.
  7. The profit/ loss of the hedge transactions shall be settled in the bank account and books of accounts of the Indian subsidiary. The AD bank shall obtain from the Indian subsidiary an annual certificate by its Statutory Auditors to this effect.
  8. The concerned AD Bank shall be responsible for monitoring all hedge transactions (OTC as well as exchange traded) booked by the non-resident entity and ensuring that the Indian subsidiary has the necessary underlying exposure for the hedge transactions.
  9. AD banks shall report hedge contracts booked under this facility by the non-resident related entity to CCIL’s trade repository with a special identification tag.

9. Simplified Hedging Facility

Users: Resident and non-resident entities, other than individuals.

Purpose: To hedge exchange rate risk on transactions, contracted or anticipated, permissible under Foreign Exchange Management Act (FEMA), 199915.

Products: Any Over the Counter (OTC) derivative or Exchange Traded Currency Derivative (ETCD) permitted under FEMA, 1999.

Cap on Outstanding Contracts: USD 30 million, or its equivalent, on a gross basis.

Designated Bank: Any Authorised Dealer Category-I (AD Cat-I) bank designated as such by the user.

Operational Guidelines, Terms and Conditions

  1. The user shall appoint an AD Cat-I bank as its “Designated Bank”. The designated bank will assess the hedging requirement of the user and set a limit up to the stipulated cap on the outstanding contracts.
  2. If hedging requirement of the user exceeds the limit in course of time, the designated bank may re-assess and, at its discretion, extend the limit up to 150% of the stipulated cap.
  3. Hedge contracts in OTC market can be booked with any AD Cat-I bank, provided the underlying cash flow takes place with the same bank.
  4. Cost reduction structures can be booked by users provided that resident unlisted companies can use such structures only if they have a minimum net worth of Rs.200 crores
  5. Users are not required to furnish any documentary evidence for establishing underlying exposure under this facility. Users may, however, provide basic details of the underlying transaction in a standardised format16, only in the case of OTC hedge contracts.
  6. Cancelled contracts may be freely rebooked with the same bank.
  7. In case of hedge contracts booked in OTC market, while losses will be recovered from the user, net gains i.e. gains in excess of cumulative losses, if any, will be transferred at the time of delivery of the underlying cash flow. In case of part delivery, net gains will be transferred on a pro-rata basis.
  8. For hedge contracts on underlying capital account transactions, gains/losses may be transferred to the user as and when they accrue if the underlying asset/liability is already in existence.
  9. On full utilisation of the limit or in case of breach of limit, user shall not book new contracts under this facility. In such a case, contracts booked earlier under this facility will be allowed to continue till they expire or are closed. Any further hedging requirements thereafter may be booked under other available hedging facilities.
  10. Users booking contracts under this facility shall not book contracts under any other facility in OTC or ETCD market except as provided in para (ix).
  11. At the end of each financial year, the user will provide the designated bank with a statement signed by the head of finance or the head of the entity, to the effect that,
    1. Hedge contracts booked in both OTC and ETCD market, under this facility, are backed by underlying exchange rate exposures, either contracted or anticipated.
    2. The exposures underlying the hedge contracts booked under this facility are not hedged under any other facility.
  12. On being appointed, the designated bank shall report the details of the users and limits granted to the Trade Repository (TR). On a request by the TR, the exchanges shall report all contracts booked by such users to the TR on a daily basis.
  13. The TR will compute user wise outstanding position (across OTC and ETCD market) and provide this information to the designated bank for monitoring. If the outstanding contracts of a user exceeds the limit (or the extended limit, if applicable) the designated bank shall advise the user to stop booking new contracts under this facility.
  14. When user migrates to other available facilities, the designated bank shall report this information to the TR. The TR shall update this information in its records and notify the recognized stock exchanges to stop reporting data for the user concerned.
  15. Banks shall have an internal policy regarding the time limit up to which a hedge contract for a given underlying can be rolled-over or rebooked by the user.

10. Operational Guidelines, Terms and Conditions applicable to all non-residents (except non-residents hedging exposures of Indian subsidiaries at para. 8 above and those hedging under Simplified Hedging Facility)

The operational guidelines as outlined for FPIs would be applicable, with the exception of the provision relating to rebooking of cancelled contracts. All foreign exchange derivative contracts permissible for a resident outside India other than a FPI, once cancelled, are not eligible to be rebooked.

 

 

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