Facilities for Persons Resident in India other than Authorised Dealers Category-I
Contracts other than Forward Contracts
Risk Management Policy for Corporates
Hedging of Commodity Price Risk in the International Commodity Exchanges/Markets
Commodity Hedging by entities in Special Economic Zones
Facilities for Persons Resident Outside India
Facilities for Foreign Institutional Investors (FIIs)
Facilities for Non-resident Indians (NRIs)
Facilities for Hedging Foreign Direct Investment in India
Management of Banks’ Assets-Liabilities
ACCOUNTS OF NON-RESIDENT BANKS
Rupee Accounts of Non-Resident Banks
Funding of Accounts of Non-resident Banks
Conversion of Rupees into Foreign Currencies
Responsibilities of Paying and Receiving Banks
Overdrafts/Loans to Overseas Branches/Correspondents
Rupee Accounts of Exchange Houses
INTER-BANK FOREIGN EXCHANGE DEALINGS
Foreign Currency Accounts/Investments in Overseas Markets
A 1. A person resident in India may enter into a forward contract with an Authorised Dealer Category-I (AD) bank in India to hedge an exposure to exchange risk in respect of a transaction for which sale and/or purchase of foreign exchange is permitted under the Act, or rules or regulations or directions or orders made or issued thereunder, subject to the following terms and conditions:
A 2. AD banks may also allow importers and exporters to book forward contracts on the basis of a declaration of an exposure and based on past performance upto 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, subject to the following conditions:
A 3. A forward contract cancelled with one AD bank can be rebooked with another AD bank subject to the following conditions:
A 4. (a) Residents having overseas direct investments (in equity and loan) are permitted to hedge the exchange risk arising out of such investments. AD banks may enter into forward contracts with residents for hedging such investments subject to verification of exposure. Contracts covering overseas direct investments can be cancelled or rolled over on the due dates. However, AD banks may permit rebooking only to the extent of 50% of the cancelled contracts.
(b) If a hedge becomes naked in part or full owing to shrinking of the market value of the overseas direct investment, the hedge may continue to the original maturity. Roll over on due date shall be permitted up to the extent of the market value as on that date.
A 5. AD banks may also enter into forward contracts with residents in respect of transactions denominated in foreign currency but settled in Indian Rupees including hedging the economic (currency indexed) exposure of importers in respect of customs duty payable on imports. These contracts shall be held till maturity and cash settlement would be made on the maturity date by cancellation of the contracts. Forward contracts covering such transactions once cancelled, are not eligible to be rebooked. However, in the event of change in the rate of customs duties due to government notifications, importers may be allowed to cancel and/or rebook the forward contracts before maturity.
A 6. (a) A person resident in India who has borrowed foreign exchange in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000, may enter into an Interest Rate Swap or Currency Swap or Coupon Swap or Foreign Currency Option or Interest Rate Cap or Collar (purchases) or Forward Rate Agreement (FRA) contract with an AD bank in India or with a branch outside India of a bank authorized to deal in foreign exchange in India or with an Off-shore Banking Unit in India for hedging his loan exposure and unwinding from such hedges, provided that:
These contracts may be freely cancelled and rebooked.
(b) A person resident in India, who has a foreign exchange or rupee liability, may enter into a contract for Foreign Currency-Rupee Swap with an AD bank in India to hedge long term exposure under the following terms and conditions:
(c) AD banks may enter into Foreign Currency-Rupee Option contracts with their customers on back-toback basis. They are also permitted to run an options book subject to prior approval from the Reserve Bank. All guidelines applicable for forward contracts are applicable on rupee option contracts also. Detailed guidelines and reporting requirements are given in Annex-VII.
(d)
Explanation
The contingent foreign exchange exposure arising out of submission of a tender bid in foreign exchange is also eligible for hedging under this sub-paragraph.
Note: In respect of foreign exchange derivative contracts both involving the rupee and not involving the rupee,
A 7. AD banks should ensure that the Board of Directors of the corporate has drawn up a risk management policy, laid down clear guidelines for concluding the transactions and institutionalised the arrangements for a periodical review of operations and annual audit of transactions to verify compliance with the regulations. The periodical review reports and annual audit reports should be obtained from the concerned corporate by the authorised dealers.
A 8. (i) Residents in India, engaged in import and export trade or as otherwise approved by Reserve Bank from time to time, may hedge the price risk of all commodities in the international commodity exchanges/markets. Commercial bank ADs, satisfying certain minimum norms, authorized by the Reserve Bank, may grant permission to companies listed on a recognized stock exchange to hedge the price risk in respect of any commodity (except gold, silver, petroleum and petroleum products other than Aviation Turbine Fuel) in the international commodity exchanges/markets. Detailed guidelines and reporting requirements are given in Annex X. Applications for commodity hedging of companies/firms which are not covered by the delegated authority of Authorised Dealers Category-I may be forwarded to Reserve Bank for consideration through the International Banking Division of an AD bank along with specific recommendation giving the following details:
1. A brief description of the hedging strategy proposed, namely:
2. A copy of the Risk Management Policy approved by the Management covering;
3. Any other relevant information.
A one-time approval will be given by Reserve Bank along with the guidelines for undertaking this activity.
(ii) AD Banks authorized by the Reserve Bank, may grant permission to companies listed on a recognized stock exchange to hedge the price risk in respect of domestic purchase and sales of alminium, copper, lead, nickel and zinc and in respect of domestic purchase of aviation turbine fuel (ATF) in the international commodity exchanges based on their underlying economic exposures. Detailed guidelines and reporting requirements are given in Annex XI.
(iii) AD banks may allow entities in the Special Economic Zones (SEZ) to undertake hedging transactions in the overseas commodity exchanges/markets to hedge their commodity prices on export/import, subject to the condition that such contract is entered into on a stand-alone basis.
Note: The term ‘‘stand alone’’ means the unit in SEZ is completely isolated from financial contacts with its parent or subsidiary in the mainland or within the SEZs as far as its import/export transactions are concerned.
A 9. (a) Designated branches of AD banks maintaining accounts of FIIs may provide forward cover with rupee as one of the currencies to such customers subject to the following conditions:
(b) The eligibility for cover may be determined on the basis of the declaration of the FII. A review may be undertaken 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 an underlying exposure.
A 10. AD banks may enter into forward contracts with NRIs as per the following guidelines to hedge:
A 11. (a) AD banks may enter into forward contracts with residents outside India to hedge the investments made in India since January 1,1993, subject to verification of the exposure in India.
(b) Residents outside India having foreign direct investment in India are also permitted to enter into forward contracts with AD banks with rupee as one of the currencies to hedge the currency risk on dividend receivable by them on their investments in Indian companies.
(c) Residents outside India may also enter into forward sale contracts with AD banks to hedge the currency risk arising out of their proposed foreign direct investment in India. Such contracts 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. The tenor of the contracts should not exceed six months beyond which permission of the Reserve Bank would be required to continue with the contract. These contracts, if cancelled, shall not be eligible to be rebooked for the same inflows and exchange gains, if any, on cancellation shall not be passed on to the overseas investor.
Note: All foreign exchange derivative contracts permissible for a person resident outside India other than a FII once cancelled, are not eligible to be rebooked. FII s can rebook contracts as per para A 9. (a) (ii) above.
A.12. (a) AD banks may use the following instruments to hedge their asset-liability portfolio:
Interest Rate Swaps, Currency Swaps, and Forward Rate Agreements.
AD banks may also purchase call or put options to hedge their cross currency proprietary trading positions.
(b) The use of these instruments is subject to the following conditions:
A 13. (a) Banks authorised by Reserve Bank to operate the Gold Deposit Scheme may use exchangetraded and over-the-counter hedging products available overseas to manage the price risk. However, while using products involving options, it may be ensured that there is no net receipt of premium, either direct or implied. Banks, which are allowed to enter into forward gold contracts in India in terms of the guidelines issued by the Department of Banking Operations and Development (including the positions arising out of inter-bank gold deals) are also allowed to cover their price risk by hedging abroad in the manner indicated above.
(b) Authorised banks are permitted to enter into forward contracts with their constituents (exporters of gold products, jewellery manufacturers, trading houses, etc.) in respect of the underlying sale, purchase and loan transactions in gold with them, subject to the conditions specified by the Reserve Bank.
A 14. (a) Foreign banks may hedge the entire Tier I Capital held by them in Indian books subject to the following conditions:
(b) Foreign banks are permitted to hedge their Tier II Capital in the form of Head Office borrowing as subordinated debt, by keeping it swapped into Indian rupees at all times in terms of our Department of Banking Operations and Development (DBOD)’s circular No. IBS.BC.65/23.10.015/2001–02 dated February 14, 2002.
B 1. (i) Credit to the account of a non-resident bank is a permitted method of payment to non-residents and is, therefore, subject to the regulations applicable to transfers in foreign currency.
(ii) Debit to the account of a non-resident bank is in effect an inward remittance in foreign currency.
B 2. Authorised Dealers may open/close rupee accounts (noninterest bearing) in the names of their overseas branches or correspondents without prior reference to the Reserve Bank. Opening of rupee accounts in the names of branches of Pakistani banks operating outside Pakistan requires specific approval of the Reserve Bank.
B 3. (i) Authorised Dealers Category-I may freely purchase foreign currency from their overseas correspondents/branches at on-going market rates to lay down funds in their accounts for meeting their bonafide needs in India.
(ii) Transactions in the accounts should be closely monitored to ensure that overseas banks do not take a speculative view on the rupee. Any such instances should be notified to the Reserve Bank.
Note: Forward purchase or sale of foreign currencies against rupees for funding is prohibited. Offer of two-way quotes to non resident banks is also prohibited.
B 4. Transfer of funds between the accounts of the same bank or different banks is freely permitted.
B 5. Balances held in rupee accounts of non-resident banks may be freely converted into foreign currency. All such transactions should be recorded in Form A2 and the corresponding debit to the account should be in form A3 under the relevant Returns.
B 6. In the case of credit to accounts the paying banker should ensure that all regulatory requirements are met and are correctly furnished in form A1/A2 as the case may be.
B 7. Requests for cancellation or refund of inward remittances may be complied with without reference to Reserve Bank after satisfying themselves that the refunds are not being made in cover of transactions of compensatory nature.
B 8. (i) Authorised Dealers Category-I may permit their overseas branches/correspondents temporary overdrawals not exceeding Rs.500 lakhs in aggregate, for meeting normal business requirements. This limit applies to the amount outstanding against all overseas branches and correspondents in the books of all the branches of the authorised dealer category-I in India. This facility should not be used to postpone funding of accounts. If overdrafts in excess of the above limit are not adjusted within five days a report should be submitted to the Central Office of the Reserve Bank, Foreign Exchange Department, Forex Markets Division, within 15 days from the close of the month, stating the reasons therefor. Such a report is not necessary if arrangements exist for value dating.
(ii) Authorised Dealers wishing to extend any other credit facility in excess of (i) above to overseas banks should seek prior approval from the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Mumbai.
B 9. Opening of rupee accounts in the names of exchange houses for facilitating private remittances into India requires approval of the Reserve Bank. Remittances through exchange houses for financing trade transactions are permitted upto Rs. 2,00,000 per transaction.
C 1. The Board of Directors of authorised dealers category-I should frame an appropriate policy and fix suitable limits for various Treasury functions.
C 2. The net overnight open exchange position (Annex-I) and the aggregate gap limits are required to be approved by the Reserve Bank.
C 3. Subject to compliance with the provisions of paragraphs C.1 and C.2, authorised dealers category-I may freely undertake foreign exchange transactions as under:
Note:
C 4. (i) Inflows into foreign currency accounts arise primarily from client-related transactions, swap deals, deposits, borrowings, etc. Authorised Dealers Category-I may maintain balances in foreign currencies up to the levels approved by the Top Management. They are free to manage the surplus in these accounts through overnight placement and investments with their overseas branches/correspondents subject to adherence to the gap limits approved by the Reserve Bank. (ii) Authorised Dealers Category-I are free to undertake investments in overseas markets up to the limits approved by their Board of Directors. Such investments may be made in overseas money market instruments and/or debt instruments issued by a foreign state with a residual maturity of less than one year and rated at least as AA (-) by Standard & Poor/FITCH IBCA or Aa3 by Moody’s. For the purpose of investments in debt instruments other than the money market instruments of any foreign state, bank’s Board may lay down country ratings and country-wise limits separately wherever necessary.
Note: For the purpose of this clause, ‘money market instrument’ would include any debt instrument whose life to maturity does not exceed one year as on the date of purchase.
(iii) Authorised Dealers Category-I may also invest the undeployed FCNR (B) funds in overseas markets in long-term fixed income securities subject to the condition that the maturity of the securities invested in do not exceed the maturity of the underlying FCNR (B) deposits.
(iv) Foreign currency funds representing surpluses in the nostro accounts may be utilised for:
(a) making loans to resident constituents for meeting their foreign exchange requirements or for the rupee working capital/capital expenditure needs subject to the prudential/interest-rate norms, credit discipline and credit monitoring guidelines in force.
(b) extending credit facilities to Indian wholly owned subsidiaries/joint ventures abroad in which at least 51 per cent equity is held by a resident company, subject to the guidelines issued by Reserve Bank (Department of Banking Operations & Development).
(v) Authorised Dealers may write-off/transfer to unclaimed balances account, unreconciled debit/credit entries as per instructions issued by Department of Banking Operations and Development, from time to time.
C 5. (a) All categories of overseas foreign currency borrowings of authorised dealers category-I, (except for borrowings at (c) below), including existing External Commercial Borrowings and loans/overdrafts from their Head Office, overseas branches and correspondents and overdrafts in nostro accounts (not adjusted within five days), shall not exceed 25 per cent of their unimpaired Tier I capital or USD 10 million (or its equivalent), whichever is higher. The aforesaid limit applies to the aggregate amount availed of by all the offices and branches in India from all their branches/correspondents abroad and also includes overseas borrowings in gold for funding domestic gold loans (cf. DBOD circular No. IBD.BC. 33/23.67.001/2005–06 dated September 5, 2005). If drawals in excess of the above limit are not adjusted within five days, a report, as per the format in Annex-VIII, should be submitted to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Mumbai 400001, within 15 days from the close of the month in which the limit was exceeded. Such a report is not necessary if arrangements exist for value dating.
(b) The funds so raised may be used for purposes other than lending in foreign currency to constituents in India and repaid without reference to the Reserve Bank. As an exception to this rule, AD banks are permitted to use borrowed funds as also foreign currency funds received through swaps for granting foreign currency loans for export credit in terms of IECD Circular No 12/04.02.02/2002–03 dated January 31,2003. Any fresh borrowing above this limit shall be made only with the prior approval of the Reserve Bank. Applications for fresh ECBs should be made as per the current ECB Policy.
(c) The following borrowings would continue to be outside the limit of 25 per cent of unimpaired Tier I capital or USD 10 million (or its equivalent), whichever is higher:
(d) Interest on loans/overdrafts may be remitted (net of taxes) without the prior approval of Reserve Bank.
D (i) The Head/Principal Office of each authorised dealer category-I should submit daily statements of Foreign Exchange Turnover in Form FTD and Gaps, Position and Cash Balances in Form GPB through the Online Returns Filing System (ORFS) as per format given in Annex-II.
(ii) The Head/Principal Office of each authorised dealer category-I should forward a statement of Nostro/Vostro Account balances on a monthly basis in the format given in Annex-III to the Director, Division of International Finance, Department of Economic Analysis and Policy, Reserve Bank of India, Central Office Building, 8th Floor, Fort, Mumbai-400 001. The data may also be transmitted by fax or e-mail at the numbers/addresses given in the format.
(iii) Authorised Dealers Category-I should consolidate the data on cross currency derivative transactions undertaken by residents in terms of Paragraph A 6 (b) and (d) and submit halfyearly reports (June and December) to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Mumbai- 400 001 as per the format indicated in the Annex-IV.
(iv) Authorised Dealers Category-I should forward details of exposures in foreign exchange as on 1st April every year as per the format indicated in Annex-V to the Chief General Manger, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Mumbai, 400 001. Please note that details of exposures of all corporate clients have to be included in the report.
(v) Authorised Dealers Category-I have to report their total outstanding foreign currency borrowings under all categories as on the last Friday of every month to The Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Mumbai-400 001, as per the format in Annex-VIII. The report should be received by the 10th of the following month.
(vi) Authorised Dealers Category-I are required to submit a monthly report (as on the last Friday of every month) on the limits granted and utilized by their constituents under the facility of booking forward contracts on past performance basis, as per the format in Annex-IX. The report may be forwarded to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Mumbai-400 001 and by e-mail to [email protected] so as to reach the Department by the 10th of the following month.
(vii) The Head/Principal Office of each authorised dealer category-I should submit a statement in form BAL giving details of their holdings of all foreign currencies on fortnightly basis through Online Returns Filing System (ORFS) within seven calendar days from the close of the reporting period to which it relates.
(viii) A monthly statement should be furnished to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Mumbai-400 001, before the 10th of the succeeding month, in respect of cover taken by FIIs, indicating the name of the FII/fund, the eligible amount of cover, the actual cover taken, etc. as per the format in Annex XII.
(ix) The Head/Principal Office of each authorised dealer category-I should furnish an up-to-date list (in triplicate) of all its offices/branches, which are maintaining rupee accounts of nonresident banks as at the end of December every year giving their code numbers allotted by Reserve Bank. The list should be submitted before 15th January of the following year to the Central Office of the Reserve Bank, Foreign Exchange Department, Central Statistical Division, Mumbai 400 001. The offices/branches should be classified according to area of jurisdiction of Reserve Bank Offices within which they are situated.
1. Coverage
For banks incorporated in India, the exposure limits fixed by the Management should be the aggregate for all branches including their overseas branches and Off-shore Banking Units. For foreign banks, the limits will cover only their branches in India.
Capital refers to Tier I capital as per instructions issued by Reserve Bank of India (Department of Banking Operations and Development).
3. Calculation of the Net Open Position in a Single Currency
The open position must first be measured separately for each foreign currency. The open position in a currency is the sum of (a) the net spot position, (b) the net forward position and (c) the net options position.
(a) Net Spot Position
The net spot position is the difference between foreign currency assets and the liabilities in the balance sheet. This should include all accrued income/expenses.
(b) Net Forward Position
This represents the net of all amounts to be received less all amounts to be paid in the future as a result of foreign exchange transactions which have been concluded. These transactions, which are recorded as off-balance sheet items in the bank’s books, would include:
(i) spot transactions which are not yet settled;
(ii) forward transactions;
(iii) guarantees and similar commitments denominated in foreign currencies which are certain to be called;
(iv) net of amounts to be received/paid in respect of currency futures, and the principal on currency futures/swaps.
(c) Options Position
The options position is the “delta-equivalent” spot currency position as reflected in the authorised dealer’s options risk management system, and includes any delta hedges in place which have not already been included under 3(a) or 3(b) (i) and (ii).
4. Calculation of the Overall Net Open Position
This involves measurement of risks inherent in a bank’s mix of long and short position in different currencies. It has been decided to adopt the “shorthand method” which is accepted internationally for arriving at the overall net open position. Banks may, therefore, calculate the overall net open position as follows:
Overall net foreign exchange position is the higher of (iv) or (v). The overall net foreign exchange position arrived at as above must be kept within the limit approved by Reserve Bank.
Note : Authorised Dealer banks should report all derivative transactions including forward exchange contracts on the basis of PV adjustment for the purpose of calculation of the net open position. The following yield curves may be used to arrive at the discount factors:
(i) In respect of Forward Exchange Contracts with tenor upto 12 months:
Applicable LIBOR rate.
(ii) In respect of Forward Exchange Contracts with
tenor beyond 12 months and upto 13 months:
LIBOR rates for 11 months & 12 months may be considered; the difference between these 2 months can be added to the LIBOR rate for 12 months to arrive at the 13 months LIBOR rate.
(iii) In respect of Forward Exchange Contracts with tenor beyond 13 months and all other derivative contracts:
The discount factors for arriving at the net present value may be computed on the basis of the current swap curve as appearing on page ICAP 1 and SWAQ of the REUTERS screen on a consistent basis (i.e. adopting a specified time at which the same is to be determined). The methodology to be adopted/selection of the rate/cut-off time etc. are to be a part of respective bank’s laid down policy guidelines by the Management.
5. Capital Requirement
As prescribed by Reserve Bank from time to time
The guidelines and formats for preparation of the FTD and GPB reports are given below. Authorised dealers Category-I may ensure that the reports are properly compiled on the basis of these guidelines: The data for a particular date has to reach us by the close of business of the following working day.
1. SPOT- Cash and tom transactions are to be included under ‘Spot’ transactions.
2. SWAP- Only foreign exchange swaps between authorised dealers category-I should be reported under swap transactions. Long term swaps (both cross currency and foreign currency-rupee swaps) should not be included in this report. Swap transactions should be reported only once and should not be included under either the ‘spot’ or ‘forward’ transactions. Buy/Sell swaps should be included in the ‘Purchase’ side under ‘Swaps’ while Sell/buy swaps should figure on the ‘Sale’ side.
3. Cancellation of forwards- The amount required to be reported under cancellation of forward contracts against purchases from merchants should be the aggregate of cancelled forward merchant sale contracts by authorised dealers category-I (adding to the supply in the market). On the sale side of cancelled forward contracts, aggregate of the cancelled forward purchase contracts should be indicated (adding to the demand in the market).
4 ‘FCY/FCY’ transactions- Both the legs of the transactions should be reported in the respective columns. For example in a EUR/USD purchase contract, the EUR amount should be included in the purchase side while the USD amount should be included in the sale side.
5. Transactions with RBI should be included in inter-bank transactions. Transactions with financial institutions other than banks authorised to deal in foreign exchange should be included under merchant transactions.
1. Foreign Currency Balances - Cash balances and investments in all foreign currencies should be converted into US dollars and reported under this head.
2. Net open exchange position- This should indicate the overall overnight net open exchange position of the authorised dealer category-I in Rs Crore. The net overnight open position should be calculated on the basis of the instructions given in Annex I.
3. Of the above FCY/INR- The amount to be reported is the position against the rupee- i.e. the net overnight open exchange position less cross currency position, if any.
Statement showing daily turnover of foreign exchange dated………
GPB
Statement showing gaps, position and cash balances as on………..
Foreign Currency Balances | : | IN USD MILLION |
---|---|---|
(Cash Balance + All Investments) | ||
Net Open Exchange Position (Rs.) | : | O/B (+)/O/S (-) IN INR CRORE |
Of the above FCY/INR | : | IN INR CRORE |
AGL maintained (In USD mio) | : | VaR maintained(In INR): |
FOREIGN CURRENCY MATURITY MISMATCH (IN USD MILLION)
I month | II months | III months | IV months | V months | VI months | VII months |
Statement of Nostro/Vostro Balances for the month of
Name & address of the Authorised Dealer Category-I ……..
Sr. No. | Currency | Net balance in Nostro Account | Net balance in Vostro Account. |
---|---|---|---|
1 | USD | ||
2 | EUR | ||
3 | JPY | ||
4 | GBP | ||
5 | Rupee | ||
6 | Other currencies (in US $ million) |
Note: In case the variation in each item above (given at 1 to 5) exceeds 10% in a month, the reason may be given briefly, as a footnote.
This statement should be addressed to The Director, Division of international Finance, Department of Economic Analysis and Policy, Reserve Bank of India, 8th Floor, Mumbai400 001. Phone: 0222266 3791. Fax022 2262 2993, 2266 0792. e.mail: [email protected]/[email protected]
Product | No. of transactions | Notional principal amount in USD |
---|---|---|
Interest rate swaps | ||
Currency swaps | ||
Coupon swaps | ||
Foreign currency option | ||
Interest rate caps of collars (Purchases) | ||
Forward rate agreement | ||
Any other product as permitted by Reserve Bank from time to time |
Information relating to exposures in foreign currency as on April 1
Name of the bank:____________
Note: Authorised dealers Category-I should consolidate the above data for the bank as a whole and forward a report in EXCEL format giving corporate-wise balances to the Chief General Manager, Foreign Exchange Department, Reserve Bank of India, Central Office, Forex Markets Division, Mumbai- 400 001 before June 30, every year.
@ Calculated on the basis of the last three years’ average, duly factoring in subsequent major changes, if any.
# Based on actuals.
Statement giving details of import/export turnover, overdues, etc.
Name of the constituent: ______________________________________
(Amount in USD Million)
AD banks are permitted to offer foreign currency – rupee options under the following terms and conditions:
(a) This product may be offered by AD banks having a minimum CRAR of 9 per cent, on a back-to-back basis.
(b) AD banks having adequate internal control, risk monitoring/management systems, mark to market mechanism and fulfilling the following criteria will be allowed to run an option book after obtaining a one time approval from the Reserve Bank:
(c) For the present, AD banks can offer only plain vanilla European options.
(d) (i) Customers can purchase call or put options.
(ii) Customers can also enter into packaged products involving cost reduction structures provided the structure does not increase the underlying risk and does not involve customers receiving premium.
(iii) Writing of options by customers is not permitted. However, zero cost option structures can be allowed.
(e) AD banks shall obtain an undertaking from customers interested in using the product that they have clearly understood the nature of the product and its inherent risks.
(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 maturity, the contract may be cash settled based on the market value of an identical offsetting option.
(h) All the conditions applicable for booking, rolling over and cancellation of forward contracts would be applicable to option contracts also. The limit available for booking of forward contracts on past performance basis would be inclusive of option transactions. Higher limits will be permitted on a case-by-case basis on application to the Reserve Bank as in the case of forward contracts.
(i) Only one hedge transaction can be booked against a particular exposure/part thereof for a given time period.
(j) Option contracts cannot be used to hedge contingent or derived exposures (except exposures arising out of submission of tender bids in foreign exchange).
2. Users
(a) Customers who have genuine foreign currency exposures in accordance with Schedules I and II of Notification No. FEMA 25/2000RB dated May 3, 2000 as amended from time to time are eligible to enter into option contracts.
(b) AD banks can use the product for the purpose of hedging trading books and balance sheet exposures.
3. Risk Management and Regulatory Issues
(a) AD banks wishing to run an option book and act as market makers may apply to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Fort, Mumbai-400001 with a copy of the approval of the Competent Authority (Board/Risk Committee/ALCO) and a copy of the detailed memorandum put up in this regard. AD banks who wish to use the product on a back-to-back basis may keep the above Division informed in this regard.
(b) Market makers would be allowed to hedge the ‘Delta’ of their option portfolio by accessing the spot markets. Other ‘Greeks’ may be hedged by entering into option transactions in the inter-bank market. The ‘Delta’ of the option contract would form part of the overnight open position. As regards inclusion of option contracts for the purpose of ‘AGL’, the “delta equivalent” as at the end of each maturity shall be taken into account. The residual maturity (life) of each outstanding option contracts can be taken as the basis for the purpose of grouping under various maturity buckets. (For definition of the various ‘Greeks’ relating to option contracts, please refer the report of the RBI Technical Committee on foreign currency-rupee options).
(c) For the present, AD banks are expected to manage the option portfolio within the risk management limits already approved by the Reserve Bank.
(d) 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-rupee options.
(e) 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.
4. Reporting
AD banks are required to report to the Reserve Bank on a weekly basis the transactions undertaken as per the formats appended.
5. Accounting
The accounting framework for option contracts will be as per FEDAI Circular No.SPL-24/FC-Rupee Options /2003 dated May 29,2003.
6. Documentation
Market participants may follow only ISDA documentation.
7. Capital Requirements
Capital requirements will be as per guidelines issued by our Department of Banking Operations and Development (DBOD) from time to time.
8. Banks should train their staff adequately and put in place necessary risk management systems before they undertake option transactions. They should also take steps to familiarise their constituents with the product.
Reports to be submitted to RBI:
[For the week ended __________________]
I. Option Transaction Report
II. Option Positions Report
Total Net Open Options Position (INR):
The total net open options position can be arrived using the methodology prescribed in A. P. (DIR Series) Circular No. 92 dated April 4, 2003.
III. Change in Portfolio Delta Report
Change in USD-INR delta for a 0.25% change in spot ($-appreciation) in INR terms =
Change in USD-INR delta for a 0.25% change in spot ($-depreciation) in INR terms =
Similarly, Change in delta for a 0.25% change in spot (FCY appreciation & depreciation separately) in INR terms for other currency pairs, such as EUR-INR, JPY-INR etc.
IV. Strike Concentration Report
This report should be prepared for a range of 150 paise around current spot level. Cumulative positions to be given.
All amounts in USD million. When the bank owns an option, the amount should be shown as positive. When the bank has sold an option, the amount should be shown as negative. All reports may be sent via e-mail by market-makers to [email protected]. Reports may be prepared as of every Friday and sent by the following Monday.
Overseas foreign currency borrowings –Report as on ………..
Amount (in equivalent USD* Million)
Booking of forward contracts on past performance basis-
Report as on …………………………..
Name of the bank-
(in USD)
Commercial bank ADs, authorized by Reserve Bank, can grant permission to companies listed on a recognized stock exchange to hedge the price risk in respect of any commodity (except gold, silver, petroleum and petroleum products other than aviation tubine fuel) in the international commodity exchanges/markets. Commercial bank ADs satisfying the minimum norms as given below and interested in extending this facility to their customers may forward the application for approval, to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Central Office, Forex Markets Division, Amar Building, 5th Floor, Mumbai – 400 001.
Minimum norms which are required to be satisfied by the ADs:
ADs may grant permission to corporates only after obtaining approval from the Reserve Bank. Reserve Bank retains the right to withdraw the permission granted to the bank, if considered necessary.
2. Before permitting corporates to undertake hedge transactions, authorized dealer would require them to submit a Board resolution indicating (i) that the Board understands the risks involved in these transactions, (ii) nature of hedge transactions that the corporate would undertake during the ensuing year, and (iii) the company would undertake hedge transaction only where it is exposed to price risk. Authorised Dealers may refuse to undertake any hedge transaction if it has a doubt about the bonafides of the transaction or the corporate is not exposed to price risk. The conditions subject to which ADs would grant permission to hedge and the guidelines for monitoring of the transactions are given below. It is clarified that hedging the price risk on domestic sale/purchase transactions in the international exchanges/markets, even if the domestic price is linked to the international price of the commodity, is not permitted. Necessary advice may be given to the customers before they start their hedging activity.
3. Banks which have been granted permission to approve commodity hedging may submit an annual report to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Central Office, Forex Markets Division, Amar Building, 5th Floor, Mumbai – 400 001 as on March 31 every year, within one month, giving the names of the corporates to whom they have granted permission for commodity hedging and the name of the commodity hedged.
4. Applications from customers to undertake hedge transactions not covered under the delegated authority may continue to be forwarded to Reserve Bank by the Authorised Dealers Category-I, for approval.
1. Commodity Hedging for Domestic Transactions - Select Metals
AD Category – I banks, which have specifically been authorised by Reserve Bank in this regard, may, permit domestic producers/users to hedge their price risk on aluminium, copper, lead, nickel and zinc in international commodity exchanges, based on their underlying economic exposures. Hedging may be permitted up to the average of previous three financial years’ (April to March) actual purchases/sales or the previous year’s actual purchases/sales turnover, whichever is higher, of the above commodities. Further, only standard exchange traded futures and options (purchases only) may be permitted.
2. Commodity Hedging for Domestic Purchases –Aviation Turbine Fuel (ATF)
AD Category – I banks, which have specifically been authorised by Reserve Bank in this regard, may also permit actual users of aviation turbine fuel (ATF) to hedge their economic exposures in the international commodity exchanges based on their domestic purchases. If the risk profile warrants, the actual users of ATF may also use OTC contracts. AD Category – I banks should ensure that permission for hedging ATF is granted only against firm orders and the necessary documentary evidence should be retained by them.
Note: (i) AD Category – I banks should ensure that the entities entering into hedging activities under para 1 and 2 above should have Board approved policies which define the overall framework within which derivatives activities should be conducted and the risks controlled.
(ii) Applications from customers to undertake hedge transactions not covered under the delegated authority may continue to be forwarded to Reserve Bank by the AD Category – I banks, for approval as hitherto.
Statement – Details of Forward cover undertaken by FII clients
Month –
Part A – Details of forward cover (without rebooking) outstanding
Name of FII
Current Market Value (USD mio)
Part B – Details of transactions permitted to be cancelled and rebooked
Name of FII
Market Value as determined at start of year
Name of the AD Category – I bank :
Signature of the Authorised official :
Date:
Stamp :
List of Circulars/Notifications which have been consolidated in the Master Circular on Risk Management and Inter-Bank Dealings
This circular should be read in conjunction with FEMA, 1999 and the Rules/Regulations/Directions/orders/Notifications issued thereunder
3.133.108.68