rsk mgmt and inter bnk deals

8/6/2019 Rsk Mgmt and Inter Bnk Deals

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INDEXPART ARISK MANAGEMENTSECTION IFacilities for Persons Resident in India otherthan Authorised Dealers Category-I

SECTION IIFacilities for Persons Resident outside IndiaSECTION IIIFacilities for Authorised Dealers Category-IPART BACCOUNTS OF NON-RESIDENT BANKSPART CINTER-BANK FOREIGN EXCHANGE DEALINGSPART DREPORTS TO THE RESERVE BANKAnnex IAnnex II

Annex IIIAnnex IVAnnex VAnnex VIAnnex VIIAnnex VIIIAnnex IXAnnex XAnnex XIAnnex XIIAnnex XIIIAnnex XIVAnnex XV

Annex XVIAnnex XVIIAppendix

PART ARISK MANAGEMENTSECTION IFacilities for Persons Resident in India otherthan Authorised Dealers Category-IThe facilities for persons resident in India(other than AD Category I banks) are elaboratedunder paragraphs A and B. Paragraph A describesthe products and operational guidelines for therespective product. In addition to theoperational guidelines under A, the generalinstructions that are applicable across allproducts for residents (other than AD Category I

banks) are detailed under Paragraph B.A. Products and Operational GuidelinesThe product/purpose-wise facilities for personsresident in India (other than AD Category Ibanks) are detailed under the following

subheads:1) Contracted Exposure

2) Probable Exposure3) Special Dispensation

1) Contracted Exposures


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AD Category I banks have to evidence theunderlying documents so that the existence ofunderlying foreign currency exposure can beclearly established. AD Category I banks,through verification of documentary evidence,should be satisfied about the genuineness of the

underlying exposure, irrespective of thetransaction being a current or a capitalaccount. Full particulars of the contractsshould be marked on the original documents under

proper authentication and retained forverification. However, in cases where thesubmission of original documents is notpossible, a copy of the original documents, duly

certified by an authorized official of the user,

may be obtained. In either of the cases, beforeoffering the contract, the AD Category I banksshould obtain an undertaking from the customerand also quarterly certificates from thestatutory auditor (for details refer para B (b)for General Instructions). While details of theunderlying have to be recorded at the time ofbooking the contract, in the view of logisticissues, a maximum period of 15 days may beallowed for production of the documents. If the

documents are not submitted by the customerwithin 15 days, the contract may be cancelled,

and the exchange gain, if any, should not bepassed on to the customer. In the event ofnon-submission of the documents by the customerwithin 15 days on more than three occasions in a

financial year, booking of permissiblederivative contracts in future may be allowedonly against production of the underlyingdocuments, at the time of booking the contract.The products available under this facility areas follows:i) Forward Foreign Exchange ContractsParticipantsMarket-makers - AD Category I banksUsers - Persons resident in IndiaPurposea) To hedge exchange rate risk in respect oftransactions for which sale and /or purchase offoreign exchange is permitted under the FEMA1999, or in terms of the rules/regulations/directions/orders made or issuedthere under.b) To hedge exchange rate risk in respect of the

market value of overseas direct investments (in

equity and loan).Contracts covering overseas direct investment(ODI) can be cancelled or rolled over on due


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dates. However, AD Category I banks may permitrebooking only to the extent of 50 per cent ofthe cancelled contracts.If a hedge becomes naked in part or full owingto contraction ( due to pricemovement/impairment) of the market value of theODI, the hedge may be allowed to continue until

maturity, if the customer so desires. Rolloverson due date shall be permitted up to the extentof the market value as on that date.c) To hedge exchange rate risk of transactionsdenominated in foreign currency but settled inINR, including hedging the economic (currencyindexed) exposure of importers in respect ofcustoms duty payable on imports.Forward foreign exchange contracts covering such

transactions will be settled in cash on

maturity.

These contracts once cancelled, are not eligibleto be rebooked.In the event of any change in the rate(s) ofcustoms duties, due to Government notificationssubsequent to the date of the forward contracts,

importers may be allowed to cancel and/or rebook

the contracts before maturity.Operational Guidelines, Terms and ConditionsGeneral principles to be observed for forwardforeign exchange contracts.

The maturity of the hedge should not exceed thematurity of the underlying transaction. Thecurrency of hedge and tenor, subject to theabove restrictions, are left to the customer.Where the currency of hedge is different fromthe currency of the underlying exposure, therisk management policy of the corporate,approved by the Board of the Directors, shouldpermit such type of hedging.Where the exact amount of the underlyingtransaction is not ascertainable, the contractmay be booked on the basis of reasonableestimates. However, there should be periodicalreview of the estimates.Foreign currency loans/bonds will be eligiblefor hedge only after final approval is accordedby the Reserve Bank, where such approval isnecessary or Loan Registration Number isallotted by the Reserve Bank.Global Depository Receipts (GDRs)/AmericanDepository Receipts (ADRs) will be eligible forhedge only after the issue price has beenfinalized.Balances in the Exchange Earner's ForeignCurrency (EEFC) accounts sold forward by the

account holders shall remain earmarked fordelivery and such contracts shall not becancelled. They are, however, eligible for


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rollover, on maturity.All non-INR forward contracts can be rebooked on

cancellation subject to condition (h) below.Forward contracts, involving the Rupee as one of

the currencies, booked by residents to hedge

current account transactions, regardless of thetenor, and to hedge capital accounttransactions, falling due within one year, maybe allowed to be cancelled and rebooked subjectto condition (h) below. This relaxation ofcancellation and rebooking will not be available

to forward contracts booked on past performancebasis without documents as also forwardcontracts booked to hedge transactionsdenominated (or indexed) in foreign currency but

settled in INR.The facility of cancellation and rebooking isnot permitted for forward contracts, involvingRupee as one of the currencies, booked byresidents to hedge capital account transactionsfor tenor greater than one year. These forwardcontract(s) if cancelled with one AD Category Ibank can be rebooked with another AD CategoryI bank, subject to the following conditions:the switch is warranted by competitiverates on offer, termination of bankingrelationship with the AD Category I bankwith whom the contract was originally

booked;the cancellation and rebooking are donesimultaneously on the maturity date of thecontract; andthe responsibility of ensuring that theoriginal contract has been cancelled rests with

the AD Category I bank who undertakes rebookingof the contract.The facility of rebooking should not bepermitted unless the corporate has submitted the

exposure information as prescribed in Annex V.

Substitution of contracts for hedging tradetransactions may be permitted by an AD CategoryI bank on being satisfied with thecircumstances under which such substitution hasbecome necessary. The AD Category I bank mayalso verify the amount and tenor of theunderlying substituted.ii) Cross Currency Options (not involving Rupee)ParticipantsMarket-makers - AD Category I banks as approved

for this purpose by the Reserve Bank

Users Persons resident in India


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PurposeTo hedge exchange rate risk arising out of trade

transactions.

To hedge the contingent foreign exchange

exposure arising out of submission of a tenderbid in foreign exchange.Operational Guidelines, Terms and ConditionsAD Category I banks can only offer plain vanilla

European options1.Customers can buy call or put options.These transactions may be freely booked and/ orcancelled subject to verification of theunderlying.All guidelines applicable for cross currencyforward contracts are applicable to cross

currency option contracts also.Cross currency options should be written by ADCategory I banks on a fully covered back-to-back

basis. The cover transaction may be undertakenwith a bank outside India, an Off-shore BankingUnit situated in a Special Economic Zone or aninternationally recognized option exchange oranother AD Category I bank in India. AD Category

I banks desirous of writing options, shouldobtain a one-time approval from the ChiefGeneral Manager, Reserve Bank of India, Foreign

Exchange Department, Forex Markets Division,Central Office, Amar Building 5th Floor, Mumbai,

400001, before undertaking the business.iii) Foreign Currency - INR OptionsParticipantsMarket-makers - AD Category I banks, as approved

for this purpose by the Reserve Bank.

Users Persons resident in IndiaPurposeTo hedge foreign currency exposures inaccordance with Schedule I of Notification No.FEMA 25/2000-RB dated May 3, 2000, as amendedfrom time to time.To hedge the contingent foreign exchangeexposure arising out of submission of a tenderbid in foreign exchange.Operational Guidelines, Terms and ConditionsAD Category I banks having a minimum CRAR of 9per cent, can offer foreign currency INRoptions on a back-to-back basis.For the present, AD category I banks can offeronly plain vanilla European options.

Customers can buy call or put options.All guidelines applicable for foreigncurrency-INR foreign exchange forward contracts


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are applicable to foreign currency-INR optioncontracts also.AD Category I banks having adequate internalcontrol, risk monitoring/ management systems,mark to market mechanism, etc. are permitted torun a foreign currency INR options book onprior approval from the Reserve Bank, subject to

conditions. AD Category I banks desirous ofrunning a foreign currency-INR options book andfulfilling minimum eligibility criteria listedbelow, may apply to the Reserve Bank with copies

of approval from the competent authority (Board/

Risk Committee/ ALCO), detailed memorandum inthis regard, specific approval of the Board forthe type of option writing and permissiblelimits. The memorandum put up to the Board

should clearly mention the downside risks, amongother matters.Minimum Eligibility Criteria:Net worth not less than Rs 300 croreCRAR of 10 per centNet NPAs not exceeding 3 per cent of the netadvancesContinuous profitability for at least threeyearsThe Reserve Bank will consider the applicationand accord a one-time approval at itsdiscretion. AD Category I banks are expected to

manage the option portfolio within the ReserveBank approved risk management limits.AD banks may quote the option premium in Rupeesor as a percentage of the Rupee/foreign currency

notional.Option contracts may be settled on maturityeither by delivery on spot basis or by net cashsettlement in Rupees on spot basis as specifiedin the contract. In case of unwinding of atransaction prior to the maturity, the contractmay be cash settled based on market value of anidentical off-setting option.Market makers are allowed to hedge the Deltaof their option portfolio by accessing the spotand forward markets. Other Greeks may behedged by entering into option transactions inthe inter-bank market.The Delta of the option contract would formpart of the overnight open position.The Delta equivalent as at the end of eachmaturity shall be taken into account for thepurpose of AGL. The residual maturity (life) ofeach outstanding option contract can be taken as

the basis for the purpose of grouping undervarious maturity bucketsAD banks running an option book are permitted to


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initiate plain vanilla cross currency optionpositions to cover risks arising out of marketmaking in foreign currency-INR options.Banks should put in place necessary systems formarking to market the portfolio on a dailybasis. FEDAI will publish daily a matrix of

polled implied volatility estimates, whichmarket participants can use for marking tomarket their portfolio.The accounting framework for option contractswill be as per FEDAI circular No.SPL-24/FC-Rupee

Options/2003 dated May 29, 2003.iv) Foreign Currency-INR SwapsParticipantsMarket-makers AD Category I banks in India.Users Residents having a foreign currency liability

and undertaking a foreign currency-INR swap tomove from a foreign currency liability to aRupee liability.Incorporated resident entities having a rupeeliability and undertaking an INR foreigncurrency swap to move from rupee liability to aforeign currency liability, subject to certainminimum prudential requirements, such as riskmanagement systems and natural hedges oreconomic exposures. In the absence of naturalhedges or economic exposures, the INR-foreigncurrency swap (to move from rupee liability to a

foreign currency liability) may be restricted to

listed companies or unlisted companies with aminimum net worth of Rs 200 crore. Further, theAD Category I bank is required to examine thesuitability and appropriateness of the swap andbe satisfied about the financial soundness ofthe corporate.PurposeTo hedge exchange rate and/or interest rate risk

exposure for those having long-term foreigncurrency borrowing or to transform long-term INR

borrowing into foreign currency liability.Operational Guidelines, Terms and ConditionsNo swap transactions involving upfront paymentof Rupees or its equivalent in any form shall be

undertaken.The term long-term exposure means exposureswith residual maturity of one year or more.Swap transactions may be undertaken by ADCategory I banks as intermediaries by matchingthe requirements of corporate counterparties.

While no limits are placed on the AD Category Ibanks for undertaking swaps to facilitatecustomers to hedge their foreign exchange


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exposures, a limit of USD 100 million is placedfor net supply of foreign exchange in the market

on account of swaps which facilitate customersto assume foreign currency liability. Positionsarising out of cancellation of foreigncurrency-INR swaps by customers need not be

reckoned within this cap.With reference to the specified limits for swaptransactions facilitating customers to assume aforeign currency liability, the limit will bereinstated on account of cancellation/ maturityof the swap and on amortization, up to theamounts amortized.The swap transactions, once cancelled, shallnot be rebooked or re-entered, by whichevermechanism or by whatever name called.AD Category I banks should not offer leveragedswap structures. Typically, in leveraged swap

structures, a multiplicative factor other thanunity is attached to the benchmark rate(s),which alters the payables or receivablesvis--vis the situation in the absence of such afactor.The notional principal amount of the swap should

not exceed the outstanding amount of theunderlying loan.The maturity of the swap should not exceed theremaining maturity of the underlying loan.v) Cost Reduction Structures i.e. cross currency

option cost reduction structures and foreigncurrency INR option cost reduction structures.ParticipantsMarket-makers - AD Category I banksUsers Listed companies and theirsubsidiaries/joint ventures/associates havingcommon treasury and consolidated balance sheetor unlisted companies with a minimum net worthof Rs. 200 croreprovidedAll such products are fair valued on eachreporting date;The companies follow the Accounting Standardsnotified under section 211 of the Companies Act,

1956 and other applicable Guidance of theInstitute of Chartered Accountants of India(ICAI) for such products/ contracts as also theprinciple of prudence which requires recognition

of expected losses and non-recognition ofunrealized gains;Disclosures are made in the financial statements

as prescribed in ICAI press release dated 2nd

December 2005; andThe companies have a risk management policy with


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a specific clause in the policy that allowsusing the type/s of cost reduction structures.(Note: The above accounting treatment is atransitional arrangement till AS 30 / 32 orequivalent standards are notified.)PurposeTo hedge exchange rate risk arising out of trade

transactions and External Commercial Borrowings(ECBs).Operational Guidelines, Terms and ConditionsWriting of options by the users, on a standalone

basis, is not permitted.Users can enter into option strategies ofsimultaneous buy and sell of plain vanillaEuropean options, provided there is no netreceipt of premium.Leveraged structures, digital options, barrier

options, range accruals and any other exoticproducts are not permitted.The portion of the structure with the largestnotional, computed over the tenor of thestructure, should be reckoned for the purpose of

underlying.The delta of the options should be explicitlyindicated in the term sheet.AD Category I banks may, stipulate additionalsafeguards, such as, continuous profitability,higher net worth, turnover, etc depending on the

scale of forex operations and risk profile ofthe users.The maturity of the hedge should not exceed thematurity of the underlying transaction andsubject to the same the users may choose thetenor of the hedge. In case of tradetransactions being the underlying, the tenor ofthe structure shall not exceed two years.The MTM position should be intimated to theusers on a periodical basis.vi) Hedging of Borrowings in foreign exchange,which are in accordance with the provisions ofForeign Exchange Management (Borrowing andLending in Foreign Exchange) Regulations, 2000.Products Interest rate swap, Cross currencyswap, Coupon swap, Cross currency option,Interest rate cap or collar (purchases), Forward

rate agreement (FRA)ParticipantsMarket-makers AD Category I banks in IndiaBranch outside India of an Indian bankauthorized to deal in foreign exchange in IndiaOffshore banking unit in a SEZ in India.

Users Persons resident in India who have borrowedforeign exchange in accordance with the


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provisions of Foreign Exchange Management(Borrowing and Lending in Foreign Exchange)Regulations, 2000.PurposeFor hedging interest rate risk and currency risk

on loan exposure and unwinding from such hedges

Operational Guidelines, Terms and ConditionsThe products, as detailed above should notinvolve the rupee under any circumstances.Final approval has been accorded or LoanRegistration Number allotted by the Reserve Bank

for borrowing in foreign currency.The notional principal amount of the productshould not exceed the outstanding amount of theforeign currency loan.The maturity of the product should not exceedthe unexpired maturity of the underlying loan.

The contracts may be cancelled and rebookedfreely.2) Probable exposures based on past performanceParticipantsMarket-makers AD Category I banks in India.Users Importers and exporters of goods andservicesPurposeTo hedge currency risk on the basis of adeclaration of an exposure and based on pastperformance up to the average of the previousthree financial years (April to March) actualimport/export turnover or the previous years

actual import/export turnover, whichever ishigher. Probable exposure based on pastperformance can be hedged only in respect oftrades in merchandise goods as well as services.ProductsForward foreign exchange contracts, crosscurrency options (not involving the rupee),foreign currency-INR options and cost reductionstructures [as mentioned in section B para I1(v)].Operational Guidelines, Terms and Conditionsa) Corporates having a minimum net worth of Rs200 crores and an annual export and importturnover exceeding Rs 1000 crores and satisfying

all other conditions as stipulated in section Bpara I 1(v) may be allowed to use cost reduction

structures.b) The contracts booked during the currentfinancial year (April-March) and the outstanding

contracts at any point of time should not exceed

the eligible limit i.e. the average of the

previous three financial years actualimport/export turnover or the previous yearsactual import/export turnover, whichever is


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higher.c) Contracts booked in excess of 75 per cent ofthe eligible limit will be on deliverable basisand cannot be cancelled.d) These limits shall be computed separately for

import/export transactions.

e) Higher limits will be permitted on acase-by-case basis on application to the Foreign

Exchange Department, Central Office, ReserveBank of India. The additional limits, ifsanctioned, shall be on a deliverable basis.f) Any contract booked without producingdocumentary evidence will be marked off againstthis limit. These contracts once cancelled, arenot eligible to be rebooked. Rollovers are alsonot permitted.g) AD banks should permit their clients to use

the past performance facility only aftersatisfying themselves that the followingconditions are complied with:An undertaking may be taken from the customerthat supporting documentary evidence will beproduced before the maturity of all thecontracts booked.Importers and exporters should furnish aquarterly declaration to the AD Category Ibanks, duly certified by the Statutory Auditor,regarding amounts booked with other AD CategoryI banks under this facility, as per Annex VI.For an exporter customer to be eligible for this

facility, the aggregate of overdue bills shallnot exceed 10 per cent of the turnover.Aggregate outstanding contracts in excess of 50

per cent of the eligible limit may be permittedby the AD Category I bank on being satisfiedabout the genuine requirements of theircustomers after examination of the followingdocuments:A certificate from the Statutory Auditor of thecustomer that all guidelines have been adheredto while utilizing this facility.A certificate of import/export turnover of thecustomer during the past three years dulycertified by their Statutory Auditor in theformat given in Annex VII.h) The past performance limits once utilised are

not to be reinstated either on cancellation oron maturity of the contracts.i) AD Category I banks must arrive at the pastperformance limits at the beginning of everyfinancial year. The drawing up of the auditedfigures (previous year) may require some time at

the commencement of the financial year. However,


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if the statements are not submitted within three

months from the last date of the financial year,

the facility should not be provided untilsubmission of the audited figures.j) AD Category I banks must institute

appropriate systems for validating the pastperformance limits at pre-deal stage. Inaddition to the customer declarations, ADCategory I banks should also assess the pasttransactions with the customers, turnover, etc.k) AD Category I banks are required to submit amonthly report (as on the last Friday of everymonth) on the limits granted and utilised bytheir constituents under this facility asprescribed in Annex X.3) Special Dispensationi) Small and Medium Enterprises (SMEs)

ParticipantsMarket-makers AD Category I.

Users Small and Medium Enterprises (SMEs) 2PurposeTo hedge direct and / or indirect exposures ofSMEs to foreign exchange riskProductForward foreign exchange contractsOperational Guidelines: Small and MediumEnterprises (SMEs) having direct and / orindirect exposures to foreign exchange risk arepermitted to book / cancel / rebook/ roll over

forward contracts without production ofunderlying documents to manage their exposureseffectively, subject to the following

conditions:Such contracts may be booked through AD Category

I banks with whom the SMEs have creditfacilities and the total forward contractsbooked should be in alignment with the creditfacilities availed by them for their foreignexchange requirements or their working capitalrequirements or capital expenditure.AD Category I bank should carry out duediligence regarding user appropriateness andsuitability of the forward contracts to theSME customers as per Para 8.3 of

ComprehensiveGuidelines on Derivatives

issued videDBOD.No.BP.BC. 86/21.04.157/2006-07 dated April20, 2007.The SMEs availing this facility should furnish a

declaration to the AD Category I bank regardingthe amounts of forward contracts already booked,

if any, with other AD Category I banks under

this facility.ii) Resident IndividualsParticipants


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Market-makers AD Category I banksUsers: Resident IndividualsPurposeTo hedge their foreign exchange exposuresarising out of actual or anticipatedremittances, both inward and outward, can bookforward contracts, without production of

underlying documents, up to a limit of USD100,000, based on self declaration.ProductForward foreign exchange contractsOperational Guidelines, Terms and ConditionsThe contracts booked under this facility wouldnormally be on a deliverable basis. However, incase of mismatches in cash flows or otherexigencies, the contracts booked under thisfacility may be allowed to be cancelled andre-booked. The notional value of the outstanding

contracts should not exceed USD 100,000 at anytime.The contracts may be permitted to be booked upto tenors of one year only.Such contracts may be booked through AD Category

I banks with whom the resident individual hasbanking relationship, on the basis of anapplication-cum-declaration in the format givenin Annex XIV. The AD Category I banks shouldsatisfy themselves that the resident individuals

understand the nature of risk inherent in

booking of forward contracts and should carryout due diligence regarding userappropriateness and suitability of theforward contracts to such customer.B. General Instructions for OTC forexderivative contracts entered by Residents inIndiaWhile the guidelines indicated above governspecific foreign exchange derivatives, certaingeneral principles and safeguards for prudential

considerations that are applicable across theOTC foreign exchange derivatives, are detailedbelow. In addition to the guidelines under thespecific foreign exchange derivative product,the general instructions should be followedscrupulously by the users (residents in Indiaother than AD Category I banks) and the marketmakers (AD Category I banks).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 fromthe clients that the exposure is unhedged and


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has not been hedged with another AD Category Ibank. The corporates should provide an annualcertificate to the AD Category I bank certifying

that the derivative transactions are authorizedand that the Board (or the equivalent forum incase of partnership or proprietary firms) is

aware of the same.In the case of contracted exposure, AD CategoryI banks must obtain :An undertaking from the customer that the sameunderlying exposure has not been covered withany other AD Category I bank/s. Where hedging of

the same exposure is undertaken in parts, withmore than one AD Category I bank, the details of

amounts already booked with other AD Category Ibank/s should be clearly indicated in the

declaration. This undertaking can also beobtained as a part of the deal confirmation.Quarterly certificates from the statutoryauditors of the users, that the contractsoutstanding at any point of time with all ADCategory I banks during the quarter did notexceed the value of the underlying exposures.Derived foreign exchange exposures are notpermitted to be hedged. However, in case of INR-

foreign currency swaps, at the inception, theuser can enter into one time plain vanilla cross

currency option (not involving Rupee) to cap the

currency risk.In any derivative contract, the notional amountshould not exceed the actual underlying exposure

at any point in time. Similarly, the tenor ofthe derivative contracts should not exceed thetenor of the underlying exposure. The notionalamount for the entire transaction over itscomplete tenor must be calculated and theunderlying exposure being hedged must becommensurate with the notional amount of thederivative contract.Only one hedge transaction can be booked against

a particular exposure/ part thereof for a giventime period.The term sheet for the derivative transactions(except forward contracts) should alsonecessarily and clearly mention the following:the purpose for the transaction detailing howthe product and each of its components help theclient in hedging;the spot rate prevailing at the time of

executing the transaction; andquantified maximum loss/ worst downside invarious scenarios.


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AD Category I banks can offer only thoseproducts that they can price independently. This

is also applicable to the products offered evenon back to back basis. The pricing of all forexderivative products should be locallydemonstrable at all times.

The market-makers should carry out proper duediligence regarding user appropriateness andsuitability of products before offeringderivative products (except forward contracts)to users as detailed in DBOD.No.BP.BC.86/21.04.157/2006-07 dated April 20, 2007.AD Category I may share with the user thevarious scenario analysis encompassing both thepossible upside as well as the downsides andsensitivity analysis identifying the variousmarket parameters that affect the product.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.Sharing of information on derivatives betweenbanks is mandatory and as detailed vide circular

DBOD.No.BP.BC.46/08.12.001/2008-09 datedSeptember 19, 2008 and DBOD.No. BP. BC. 94/08.12.001/ 2008-09 dated December 8, 2008.4. Currency Futures on recognised Stock /New

ExchangesAs part of further developing the derivativesmarket in India and adding to the existing menuof foreign exchange hedging tools available tothe residents, currency futures contracts havebeen permitted to be traded in recognized stockexchanges or new exchanges, recognized by theSecurities and Exchange Board of India (SEBI) in

the country. The currency futures market wouldfunction subject to the directions, guidelines,instructions issued by the Reserve Bank and theSEBI, from time to time.Persons resident in India are permitted toparticipate in the currency futures market inIndia subject to directions contained in theCurrency Futures (Reserve Bank) Directions, 2008

[Notification No.FED.1/DG(SG)-2008 dated August6, 2008] (Directions) and Notification No.FED. 2

/ ED (HRK)-2009 dated January 19, 2010 issued by

the Reserve Bank of India, which have beenissued under Section 45W of the Reserve Bank of

India Act, 1934.Currency futures are subject to followingconditions:


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Permission(i) Currency futures are permitted in US Dollar(USD) - Indian Rupee (INR), Euro (EUR)-INR,Japanese Yen (JPY)-INR and Pound Sterling(GBP)-INR.(ii) Only persons resident in India maypurchase or sell currency futures contracts to

hedge an exposure to foreign exchange rate riskor otherwise.Features of currency futuresStandardized currency futures shall have thefollowing features:a. USD-INR, EUR-INR, GBP-INR and JPY-INRcontracts are allowed to be traded.

b. The size of each contract shall be USD 1000for USD-INR contracts, Euro 1000 for Euro-INRcontracts, GBP 1000 for GBP-INR contracts andJPY 100,000 for JPY-INR contracts.

c. The contracts shall be quoted and settled inIndian Rupees.

d. The maturity of the contracts shall notexceed 12 months.

e. The settlement price for USD-INR and Euro-INR

contracts shall be the Reserve Banks ReferenceRates and for GBP-INR and JPY-INR contractsshall be the exchange rates published by theReserve Bank in its press release on the last

trading day.Membership(i) The membership of the currency futuresmarket of a recognised stock exchange shall beseparate from the membership of the equityderivative segment or the cash segment.Membership for both trading and clearing, in the

currency futures market shall be subject to theguidelines issued by the SEBI.(ii) Banks authorized by the Reserve Bank undersection 10 of the Foreign Exchange ManagementAct, 1999 as AD Category - I bank arepermitted to become trading and clearing members

of the currency futures market of the recognized

stock exchanges, on their own account and onbehalf of their clients, subject to fulfillingthe minimum prudential requirements.(iii) AD Category - I banks which do not meetthe above minimum prudential requirements and AD

Category - I banks which are Urban Co-operativebanks or State Co-operative banks can

participate in the currency futures market onlyas clients, subject to approval therefore fromthe respective regulatory Departments of the


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Reserve Bank.Position limitsi. The position limits for various classes ofparticipants in the currency futures marketshall be subject to the guidelines issued by the

SEBI.

ii. The AD Category - I banks, shall operatewithin prudential limits, such as Net OpenPosition (NOP) and Aggregate Gap (AG) limits.The exposure of the banks, on their own account,

in the currency futures market shall form partof their NOP and AG limits.Risk Management measuresThe trading of currency futures shall be subject

to maintaining initial, extreme loss andcalendar spread margins and the Clearing

Corporations / Clearing Houses of the exchangesshould ensure maintenance of such margins by the

participants on the basis of the guidelinesissued by the SEBI from time to time.Surveillance and disclosuresThe surveillance and disclosures of transactions

in the currency futures market shall be carriedout in accordance with the guidelines issued bythe SEBI.Authorisation to Currency FuturesExchanges/Clearing Corporations

Recognized stock exchanges and their respectiveClearing Corporations / Clearing Houses shallnot deal in or otherwise undertake the businessrelating to currency futures unless they hold an

authorization issued by the Reserve Bank undersection 10(1) of the Foreign Exchange Management

Act, 1999.5. Currency Options on recognised Stock /NewExchangesIn order to expand the existing menu of exchange

traded hedging tools available to the residents,

plain vanilla currency options contracts havebeen permitted to be traded in recognized stockexchanges or new exchanges, recognized by theSecurities and Exchange Board of India (SEBI) in

the country.Exchange traded Currency options are subject tofollowing conditions :Permission(i) Exchange traded Currency option contracts

are permitted in US Dollar (USD) - Indian Rupee(INR).


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(ii) Only persons resident in India maypurchase or sell exchange traded currencyoptions contracts to hedge an exposure toforeign exchange rate risk or otherwise.Features of exchange traded currency optionsStandardized exchange traded currency optionsshall have the following features:

The underlying for the currency option shall beUS Dollar Indian Rupee (USD-INR) spot rate.The options shall be premium styled Europeancall and put options.The size of each contract shall be USD 1000.The premium shall be quoted in Rupee terms. The

outstanding position shall be in USD.The maturity of the contracts shall not exceedtwelve months.The contracts shall be settled in cash in Indian

Rupees.The settlement price shall be the Reserve BanksReference Rate on the date of expiry of thecontracts.Membershipi) Members registered with the SEBI for tradingin currency futures market shall be eligible totrade in the exchange traded currency optionsmarket 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 undersection 10 of the Foreign Exchange ManagementAct, 1999 as AD Category - I bank arepermitted to become trading and clearing members

of the exchange traded currency options marketof the recognized stock exchanges, on their ownaccount and on behalf of their clients, subjectto fulfilling the following minimum prudentialrequirements:Minimum net worth of Rs. 500 crores.Minimum CRAR of 10 per cent.Net NPA should not exceed 3 per cent.Made net profit for last 3 years.The AD Category - I banks, which fulfil theprudential requirements, should lay downdetailed guidelines with the approval of theirBoards for trading and clearing of the exchangetraded currency options contracts and management

of risks.iii) AD Category - I banks, which do not meetthe above minimum prudential requirements and AD

Category - I banks, which are Urban Co-operative

banks or State Co-operative banks, can


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participate in the exchange traded currencyoptions market only as clients, subject toapproval therefor from the respective regulatory

Departments of the Reserve Bank.Position limitsi) The position limits for various classes of

participants for the currency options shall besubject to the guidelines issued by the SEBI.ii) The AD Category - I banks shall operatewithin prudential limits, such as Net OpenPosition (NOP) and Aggregate Gap (AG) limits.The option position of the banks, on their ownaccount, in the exchange traded currency options

shall form part of their NOP and AG limits.Risk Management measuresThe trading of exchange traded currency optionsshall be subject to maintaining initial, extreme

loss and calendar spread margins and theClearing Corporations / Clearing Houses of theexchanges should ensure maintenance of suchmargins by the participants on the basis of theguidelines issued by the SEBI from time to time.Surveillance and disclosuresThe surveillance and disclosures oftransactions, in the exchange traded currencyoptions market, shall be carried out inaccordance with the guidelines issued by theSEBI.Authorisation to the Exchanges / the Clearing

Corporations for dealing in Currency OptionsRecognized stock exchanges and their respectiveClearing Corporations / Clearing Houses shallnot deal in or otherwise undertake the businessrelating to the exchange traded currency options

unless they hold an authorisation issued by theReserve Bank under section 10 (1) of the Foreign

Exchange Management Act, 1999.6. Commodity HedgingResidents in India, engaged in import and export

trade or as otherwise approved by the ReserveBank from time to time, are permitted to hedgethe price risk of permitted commodities in theinternational commodity exchanges/ markets. This

facility must not be used in conjunction withany other derivative product. It may be notedthat the role of Authorized Dealer banks here is

primarily to provide facilities for remittingforeign currency amounts towards marginrequirements from time to time, subject to

verification of the underlying exposure. In lieu

of making a direct remittance towards payment


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obligations arising out of commodity derivativetransactions entered into by customers withoverseas counterparties, AD Category I banks may

issue guarantees/standby letters of credit tocover these specific payment obligations related

to commodity derivatives, subject to theconditions/guidelines in Annex XV. It isclarified that the term Board, wherever usedrefers to Board of Directors or the equivalentforum in case of partnership or proprietaryfirms. The facility is divided into followingcategories:I) Delegated Routea. Hedging of price risk on actual Import/Export

of commoditiesParticipants

Users: Companies in India listed on a recognizedstock exchange engaged in import and export ofcommoditiesFacilitators: AD Category I banks specificallyauthorized by the Reserve Bank in this regard.Purpose: To hedge price risk of theimported/exported commodityProducts: Standard exchange traded futures andoptions (purchases only) in internationalcommodity exchanges. If risk profile warrantsmay use OTC contracts overseas.Operational Guidelines

AD Category I banks satisfying certain minimumnorms, and authorized by the Reserve Bank maygrant permission to companies listed on arecognized stock exchange to hedge price risk on

import/ export in respect of anycommodity(except gold, silver, platinum) in theinternational commodity exchanges/ markets. Theguidelines are given in Annex XI (A & B).b. Hedging of anticipated imports of crude oilParticipantsUsers: Domestic companies engaged in refiningcrude oil.Facilitators : AD Category I banks specificallyauthorized by the Reserve Bank in this regard.Purpose: To hedge the price risk on crude oilimports on the basis of past performance.Products: Standard exchange traded futures andoptions (purchases only) in internationalcommodity exchanges. If risk profile warrants may use OTC contracts overseas.Operational Guidelines :a) Hedging to be permitted up to 50 per cent ofthe volume of actual imports during the previous

year or 50 per cent of the average volume ofimports during the previous three financialyears, whichever is higher.


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b) Contracts booked under this facility willhave to be regularized by production ofsupporting import orders during the currency ofthe hedge. An undertaking may be obtained fromthe companies to this effect.c) All other conditions and guidelines as perAnnex XI should be complied with.

c. Hedging of price risk on domestic purchaseand sales(i) Select MetalsParticipantsUsers : Domestic producers/ users of aluminium,copper, lead, nickel and zinc listed on arecognized stock exchange.Facilitators: AD Category I banks specificallyauthorized by the Reserve Bank in this regardPurpose: To hedge the price risk on aluminium,copper, lead, nickel and zinc based on theirunderlying economic exposures

Products: Standard exchange traded futures andoptions (purchases only) in internationalcommodity exchanges.Operational Guidelines:a) Hedging may be permitted up to the average of

previous three financial years (April to March)actual purchases / sales or the previous yearsactual purchases / sales turnover, whichever ishigher, of the above commodities.b) AD Category I banks would require the user to

submit a Board resolution certifying Board

approved policies which define the overallframework within which derivatives activitiesshould be conducted and the risks controlled.c) All other conditions and guidelines as perAnnex XI (A & B) should be complied with.(ii) ATF (Aviation Turbine Fuel)ParticipantsUsers: Actual domestic users of ATF.Facilitators: AD Category I banks specificallyauthorized by the Reserve Bank in this regard.Purpose: To hedge economic exposures in respectof ATF based on domestic purchases.Products: Standard exchange traded futures andoptions (purchases only) in internationalcommodity exchanges. If risk profile warrants may use OTC contracts overseas.Operational Guidelines:a) AD Category I banks should ensure thatpermission for hedging ATF is granted onlyagainst firm orders.b) AD Category I banks should retain necessarydocumentary evidence.c) AD Category I banks would require the user to

submit a Board resolution certifying Board

approved policies which define the overallframework within which derivatives activitiesshould be conducted and the risks controlled.


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d) All other conditions and guidelines as perAnnex XI (A & B) should be complied with.(iii) Domestic purchases of crude oil and salesof petro-productsParticipantsUsers: Domestic crude oil refining companies.

Facilitators: AD Category I banks specificallyauthorized by the Reserve Bank in this regard.Purpose: To hedge commodity price risk ondomestic purchases of crude oil and domesticsales of petroleum products, which are linked to

international prices.Products: Standard exchange traded futures andoptions (purchases only) in internationalcommodity exchanges. If risk profile warrants may use OTC contracts overseas.Operational Guidelines :

a) The hedging will be allowed strictly on thebasis of underlying contracts.b) AD Category I banks should retain necessarydocumentary evidence.c) All other conditions and guidelines as perAnnex XI (A & B) should be complied with.d. Hedging of price risk on InventoryParticipantsUsers: Domestic oil marketing and refiningcompanies.Facilitators: AD Category I banks specificallyauthorized by the Reserve Bank in this regard.Purpose: To hedge commodity price risk on

Inventory.Products: Over-the-counter (OTC) / exchangetraded derivatives overseas with tenorrestricted to a maximum of one-year forward.Operational Guidelines:a) Hedge is allowed to the extent of 50 per cent

of their inventory based on the volumes in thequarter proceeding the previous quarter.b) All other conditions and guidelines as perAnnex XI (A & B) should be complied with.II) Approval RouteParticipantsUsers: Residents in India, other than companieslisted on recognized stock exchanges, engaged in

import and export of commodities or customerswho are exposed to systemic international pricerisk.Facilitators: AD Category I banksPurpose: To hedge price risk of theimported/exported commodity and systemicinternational price riskProducts: Standard exchange traded futures andoptions (purchases only) in international

commodity exchanges. If risk profile warrants may use OTC contracts overseas.Operational Guidelines:


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Applications of companies/ firms which are notcovered by the delegated authority of ADCategory I may be forwarded to the Reserve Bankfor consideration through the InternationalBanking Division of an AD Category I bankconcerned along with the latters specificrecommendations. The details of the application

are given in Annex XII.III) Entities in Special Economic Zones (SEZ)ParticipantsUsers: Entities in Special Economic Zones (SEZ)Facilitators: AD Category I banksPurpose: To hedge price risk of theimported/exported commodityProducts: Standard exchange traded futures andoptions (purchases only) in internationalcommodity exchanges. If risk profile warrants may use OTC contracts overseas.Operational Guidelines:

AD banks may allow entities in the SpecialEconomic Zones (SEZ) to undertake hedgingtransactions in the overseas commodityexchanges/markets to hedge their commodityprices on export/import, subject to thecondition that such contract is entered into ona stand-alone basis. (The term

standalone

means the unit in SEZ is completely isolatedfrom financial contacts with its parent orsubsidiary in the mainland or within the SEZs as

far as its import/export transactions areconcerned.)

NOTE: The detailed guidelines in respect ofDelegated Route and Approval Route are given inthe Annex XI and XII respectively.7. Freight hedgingDomestic oil refining companies and shippingcompanies exposed to freight risk, are permitted

to hedge their freight risk by the AD Category I

banks authorized by the Reserve Bank. Othercompanies exposed to freight risk can seek prior

permission from the Reserve Bank through theirAD Category I bank.It may be noted that the role of AuthorizedDealer banks here is primarily to providefacilities for remitting foreign currencyamounts towards margin requirements from time to

time, subject to verification of the underlyingexposure. This facility must not be used inconjunction with any other derivative product.The facility is divided into followingcategories:I) Delegated Route

Participant:Users: Domestic oil-refining companies andshipping companies.


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Facilitators: AD Category I banks, specificallyauthorized by the Reserve Bank i.e. those whohave been delegated the authority to grantpermission to listed companies to hedgecommodity price risk in the internationalcommodity exchanges / markets, subject to theconditions mentioned therein.

Purpose: To hedge freight risk.Products: Plain vanilla Over the Counter (OTC)or exchange traded products in the international

market / exchange.Operational Guidelines:The maximum tenor permissible will be one yearforward.The exchanges on which the products arepurchased must be a regulated entity in the host

country.

AD Category I banks should ensure that theentities hedging their freight exposures haveBoard Resolutions which certify that the Boardapproved Risk Management policies, defines theoverall framework within which derivativetransactions should be undertaken and the riskscontained therein.

AD Category I banks should approve this facility

only after ensuring that the sanction of thecompany

s Board has been obtained for thespecific activity and also for dealing in

overseas exchanges / markets. The Board approval

must include explicitly the authority/iespermitted to undertake the transactions, themark-to-market policy, the counterpartiespermitted for OTC derivatives, etc. and a listof transactions undertaken should be put up tothe Board on a half-yearly basis.The AD Category I bank must obtain a copy of aBoard resolution that certifies that thecorporate has a Risk Management Policy,incorporating the above details at the time ofpermitting the transaction itself and as andwhen changes made therein.The underlying exposure for the users isdetailed under (a) and (b) below:

(a) For Domestic oil refining companies:The freight hedging will be on the basis ofunderlying contracts i.e., import/export ordersfor crude oil/petroleum products.Additionally, domestic oil refining companiesmay hedge their freight risk on anticipatedimports of crude oil on the basis of their pastperformance up to 50 per cent of the volume ofactual imports of crude oil during the previous

year or 50 per cent of the average volume ofimports during the previous three financialyears, whichever is higher.


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Contracts booked under the past performancefacility will have to be regularized byproduction of underlying documents during thecurrency of the hedge. An undertaking may beobtained from the company to this effect.

(b) For shipping companies:The hedging will be on the basis of owned /

controlled ships of the shipping company whichhave no committed employment. The quantum ofhedge will be determined by the number andcapacity of these ships. The same may becertified by the statutory auditor and submitted

to the AD Category I bank.Contracts booked will have to be regularized byproduction of underlying documents i.e.employment of the ship during the currency ofthe hedge. An undertaking may be obtained fromthe company to this effect.

AD Category I banks may also ensure that thefreight derivatives being entered into by theshipping companies are reflective of theunderlying business of the shipping companies.II) Approval RouteParticipantsUsers: Companies (other than domesticoil-refining companies and shipping companies)who are exposed to freight riskFacilitators: AD Category I banksPurpose: To hedge freight riskProducts: Plain vanilla Over the Counter (OTC)or exchange traded products in the international

market / exchange.Operational GuidelinesThe maximum tenor permissible will be one yearforward.The exchanges on which the products arepurchased must be a regulated entity in the host

country.Applications of companies/ firms which are notcovered by the delegated authority of ADCategory I may be forwarded to the Reserve Bankfor consideration through the InternationalBanking Division of their AD Category I bankconcerned along with the latters specificrecommendations.SECTION IIFacilities for Persons Resident outside IndiaFor persons resident outside India, only capital

account transactions as enumerated hereunder,subject to verification of underlying exposure,are permitted to be hedged. Transactions arising

out of trade in merchandise goods as well as

services with residents or non residents are not

permitted to be hedged.


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ParticipantsMarket-makers In respect of FIIs, designatedbranches of AD Category I banks maintainingaccounts of FIIs. In all other cases, ADCategory I banks.Users Foreign Institutional Investors (FII),Investors having Foreign Direct Investments

(FDI) and Non Resident Indians (NRIs).The purpose, products and operational guidelines

of each of the users is detailed below:1. Facilities for Foreign InstitutionalInvestors (FIIs)Purposei) 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 Initial Public Offers (IPO) related

transient capital flows under the ApplicationSupported by Blocked Amount (ASBA) mechanism.ProductsForward foreign exchange contracts with rupee as

one of the currencies and foreign currency-INRoptions. Foreign Currency INR swaps for IPOrelated flows.Operational Guidelines, Terms and ConditionsThe eligibility for cover may be determined on

the basis of the declaration of the FII.AD Category I banks may undertake periodicreviews, at least at quarterly intervals, on the

basis of market price movements, fresh inflows,amounts repatriated and other relevantparameters to ensure that the forward coveroutstanding is supported by underlying

exposures.If a hedge becomes naked in part or in fullowing to contraction of the market value of theportfolio, for reasons other than sale ofsecurities, the hedge may be allowed to continue

till the original maturity, if so desired.The contracts, once cancelled cannot be rebooked

except to the extent of 10 per cent of themarket value of the portfolio as at thebeginning of the financial year. The forwardcontracts may, however, be rolled over on orbefore maturity.The cost of hedge should be met out ofrepatriable funds and /or inward remittancethrough normal banking channel.

All outward remittances incidental to the hedgeare net of applicable taxes.For IPO related transient capital flows


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FIIs can undertake foreign currency- rupee swaps

only for hedging the flows relating to the IPOunder the ASBA mechanism.The amount of the swap should not exceed theamount proposed to be invested in the IPO.The tenor of the swap should not exceed 30 days.

The contracts, once cancelled, cannot berebooked. Rollovers under this scheme will alsonot be permitted.2. Facilities for Non-resident Indians (NRIs)PurposeTo hedge the exchange rate risk on the marketvalue of investment made under the portfolioscheme in accordance with provisions of FERA,1973 or under notifications issued there underor in accordance with provisions of FEMA, 1999.To hedge the exchange rate risk on the amount of

dividend due on shares held in Indian companies.To hedge the exchange rate risk on the amountsheld in FCNR (B) deposits.To hedge the exchange rate risk on balances held

in NRE account.ProductsForward foreign exchange contracts with rupee as

one of the currencies, and foreign currency-INRoptions.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 inwhich FCNR (B) deposits are permitted to bemaintained.3. Facilities for Hedging Foreign DirectInvestment in IndiaPurposeTo hedge exchange rate risk on the market valueof investments made in India since January 1,1993, subject to verification of the exposure in

IndiaTo hedge exchange rate risk on dividendreceivable on the investments in IndiancompaniesTo hedge exchange rate risk on proposedinvestment in IndiaProductsForward foreign exchange contracts with rupee as

one of the currencies and foreign currency-INRoptions.Operational Guidelines, Terms and ConditionsIn respect of contracts to hedge exchange rate

risk on the market value of investments made inIndia, contracts once cancelled are not eligible


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to be rebooked. The contracts may, however, berolled over.In respect of proposed foreign directinvestments, following conditions would apply:Contracts to hedge exchange rate risk arisingout of proposed investment in Indian companiesmay be allowed to be booked only after ensuring

that the overseas entities have completed allthe necessary formalities and obtained necessary

approvals (wherever applicable) for theinvestment.The tenor of the contracts should not exceed six

months at a time beyond which permission of theReserve Bank would be required to continue withthe contract.These contracts, if cancelled, shall not beeligible to be rebooked for the same inflows.

Exchange gains, if any, on cancellation shallnot be passed on to the overseas investor.Operational Guidelines, Terms and Conditions The

operational guidelines as outlined for FIIswould be applicable, with the exception of theprovision relating to rebooking of cancelledcontracts. All foreign exchange derivativecontracts permissible for a resident outsideIndia other than a FII, once cancelled, are noteligible to be rebooked.SECTION IIIFacilities for Authorised Dealers Category-I

1. Management of Banks Assets-LiabilitiesUsers AD Category I banksPurpose - Hedging of interest rate and currencyrisks of foreign exchange asset-liabilityportfolioProducts - Interest Rate Swap, Interest RateCap/Collar, Currency Swap, Forward RateAgreement. AD banks may also purchase call orput options to hedge their cross currencyproprietary trading positions.Operational Guidelines, Terms and ConditionsThe use of these instruments is subject to thefollowing conditions:An appropriate policy in this regard is approved

by the Top Management.The value and maturity of the hedge should notexceed those of the underlying.No stand alone transactions can be initiated.If a hedge becomes naked, in part or full, owing

to the contraction of the value of portfolio, it

may be allowed to continue till the originalmaturity and should be marked to market at

regular intervals.The net cash flows arising out of thesetransactions are booked as income/ expenditure


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and reckoned toward foreign exchange position,wherever applicable.2. Hedging of Gold PricesUsers Banks authorised by the Reserve Bank to operatethe Gold Deposit SchemeBanks, which are allowed to enter into forward

gold contracts in India in terms of theguidelines issued by the Department of BankingOperations and Development (including thepositions arising out of inter-bank gold deals)Purpose To hedge price risk of goldProducts - Exchange-traded and over-the-counterhedging products available overseas.Operational Guidelines, Terms and ConditionsWhile using products involving options, it maybe ensured that there is no net receipt ofpremium, either direct or implied.Authorised banks are permitted to enter into

forward contracts with their constituents(exporters of gold products, jewellerymanufacturers, trading houses, etc.) in respectof the underlying sale, purchase and loantransactions in gold with them, subject to theconditions specified by the Reserve Bank in this

regard. The tenor of such contracts should notexceed six months.3. Hedging of CapitalUsers Foreign banks operating in IndiaProduct Forward foreign exchange contractsOperational Guidelines, Terms and Conditions

a. Tier I capital -The capital funds should be available in Indiato meet local regulatory and CRAR requirementsand, hence, these should not be parked in nostro

accounts. Foreign currency funds accruing out of

hedging should not be parked in Nostro accountsbut should remain swapped with banks in India at

all times.The forward contracts should be for tenors ofone or more years and may be rolled over onmaturity. Rebooking of cancelled hedges willrequire prior approval of the Reserve Bank.b. Tier II capital -Foreign banks are permitted to hedge their TierII capital in the form of Head Office borrowingas subordinated debt, by keeping it swapped into

rupees at all times in terms of DBOD circularNo.IBS.BC.65 /23.10.015/2001-02 dated February14, 2002.Banks are not permitted to enter into foreigncurrency-INR swap transactions involving

conversion of fixed rate rupee liabilities inrespect of Innovative Tier I/Tier II bonds intofloating rate foreign currency liabilities.


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4. Participation in the currency futures marketin IndiaPlease refer to Part-A Section I, paragraph 4.In continuation of the same:AD Category I Banks may be guided by the DBODinstructions vide DBOD.No.FSD.BC. 29/24.01.001/2008-09 dated August 6, 2008.

AD Category I Banks are permitted to becometrading and clearing members of the currencyfutures market of recognised stock exchanges, on

their own account and on behalf of theirclients, subject to fulfilling the followingminimum prudential requirements:

i) Minimum net worth of Rs. 500 crores.ii) Minimum CRAR of 10 per cent.iii) Net NPA should not exceed 3 per

cent.iv) Net profit for last 3 years.

The AD Category - I banks which fulfill theprudential requirements should lay down detailed

guidelines with the approval of their Boards for

trading and clearing of currency futurescontracts and management of risks.(c). AD Category - I banks which do not meet the

above minimum prudential requirements and ADCategory - I banks which are Urban Co-operativebanks or State Co-operative banks canparticipate in the currency futures market only

as clients, subject to approval and directionsfrom the respective regulatory Departments ofthe Reserve Bank.(d) The AD Category - I banks, shall operatewithin prudential limits, such as Net OpenPosition (NOP) and Aggregate Gap (AG) limits.The exposure of the banks, on their own account,

in the currency futures market shall form partof their NOP and AG limits.5. Participation in the exchange traded currency

options market in IndiaPlease refer to Part-A Section I, paragraph 5.In continuation of the same:a) AD Category - I banks are permitted to become

trading and clearing members of the exchangetraded currency options market of the recognized

stock exchanges, on their own account and onbehalf of their clients, subject to fulfillingthe following minimum prudential requirements:Minimum net worth of Rs. 500 crores.Minimum CRAR of 10 per cent.

Net NPA should not exceed 3 per cent.Made net profit for last 3 years.The AD Category - I banks, which fulfil the


33/41

prudential requirements, should lay downdetailed guidelines with the approval of theirBoards for trading and clearing of the exchangetraded currency options contracts and management

of risks.b) AD Category - I banks, which do not meet the

above minimum prudential requirements and ADCategory - I banks, which are Urban Co-operative

banks or State Co-operative banks, canparticipate in the exchange traded currencyoptions market only as clients, subject toapproval therefor from the respective regulatory

Departments of the Reserve Bank.c) The AD Category - I banks shall operatewithin prudential limits, such as Net OpenPosition (NOP) and Aggregate Gap (AG) limits.

The option position of the banks, on their ownaccount, in the exchange traded currency options

shall form part of their NOP and AG limits.PART BACCOUNTS OF NON-RESIDENT BANKS1. General(i) Credit to the account of a non-resident bank

is a permitted method of payment tonon-residents and is, therefore, subject to theregulations applicable to transfers in foreigncurrency.

(ii) Debit to the account of a non-resident bank

is in effect an inward remittance in foreigncurrency.2. Rupee Accounts of Non-Resident BanksAD Category I banks may open/close Rupeeaccounts (non-interest bearing) in the names oftheir overseas branches or correspondentswithout prior reference to the Reserve Bank.Opening of Rupee accounts in the names ofbranches of Pakistani banks operating outsidePakistan requires specific approval of theReserve Bank.3. Funding of Accounts of Non-resident Banks(i) AD Category I banks may freely purchaseforeign currency from their overseascorrespondents/branches at on-going market rates

to lay down funds in their accounts for meetingtheir bonafide needs in India.(ii) Transactions in the accounts should beclosely monitored to ensure that overseas banksdo 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


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currencies against Rupees for funding isprohibited. Offer of two-way quotes in Rupees to

non-resident banks is also prohibited.4. Transfers from other AccountsTransfer of funds between the accounts of thesame bank or different banks is freely

permitted.5. Conversion of Rupees into Foreign CurrenciesBalances held in Rupee accounts of non-residentbanks may be freely converted into foreigncurrency. All such transactions should berecorded in Form A2 and the corresponding debitto the account should be in form A3 under therelevant Returns.6. Responsibilities of Paying and Receiving

BanksIn the case of credit to accounts the payingbanker should ensure that all regulatory

requirements are met and are correctly furnishedin form A1/A2 as the case may be.7. Refund of Rupee RemittancesRequests for cancellation or refund of inwardremittances may be complied with withoutreference to Reserve Bank after satisfyingthemselves that the refunds are not being madein cover of transactions of compensatory nature.8. Overdrafts / Loans to Overseas Branches/Correspondents(i) AD Category I banks may permit theiroverseas branches/ correspondents temporary

overdrawals not exceeding Rs.500 lakhs inaggregate, for meeting normal businessrequirements. This limit applies to the amountoutstanding against all overseas branches andcorrespondents in the books of all the branchesof the authorised AD Category I bank in India.This facility should not be used to postponefunding of accounts. If overdrafts in excess ofthe above limit are not adjusted within fivedays a report should be submitted to the Reserve

Bank of India, Foreign Exchange Department,Forex Markets Division, Central Office, AmarBuilding, 5th Floor, Mumbai 400001 within 15days from the close of the month, stating thereasons thereof. Such a report is not necessaryif arrangements exist for value dating.(ii) AD Category I bank wishing to extend anyother credit facility in excess of (i) above tooverseas banks should seek prior approval fromthe Chief General Manager, Reserve Bank ofIndia, Foreign Exchange Department, ForexMarkets Division, Central Office, Amar Building,

5th Floor, Mumbai, 400001.

9. Rupee Accounts of Exchange HousesOpening of Rupee accounts in the names ofExchange Houses for facilitating private


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remittances into India requires approval of theReserve Bank. Remittances through ExchangeHouses for financing trade transactions arepermitted upto Rs.2,00,000 per transaction.PART CINTER-BANK FOREIGN EXCHANGE DEALINGS1. General

The Board of Directors of AD Category I banksshould frame an appropriate policy and fixsuitable limits for various Treasury functions.2. Position and GapsThe net overnight open exchange position(Annex-I) and the aggregate gap limits arerequired to be approved by the Reserve Bank.3. Inter-bank TransactionsSubject to compliance with the provisions ofparagraphs 1 and 2, AD Category I banks mayfreely undertake foreign exchange transactionsas under:

a) With AD Category I banks in India:(i) Buying/Selling/Swapping foreign currencyagainst Rupees or another foreign currency.

(ii) Placing/Accepting deposits andBorrowing/Lending in foreign currency.b). With banks overseas and Off-shore BankingUnits in Special Economic Zones(i) Buying/Selling/Swapping foreign currencyagainst another foreign currency to cover client

transactions or for adjustment of own position,

(ii) Initiating trading positions in theoverseas markets.NOTE :A. Funding of accounts of Non-resident banks -please refer to paragraph 3 of Part B.

B. Form A2 need not be completed for sales inthe inter-bank market, but all such transactions

shall be reported to Reserve Bank in R Returns.4. Foreign Currency Accounts/ Investments inOverseas Markets(i) Inflows into foreign currency accounts arise

primarily from client-related transactions, swap

deals, deposits, borrowings, etc. AD Category Ibanks may maintain balances in foreigncurrencies up to the levels approved by theBoard. They are free to manage the surplus inthese accounts through overnight placement andinvestments with their overseasbranches/correspondents subject to adherence tothe gap limits approved by the Reserve Bank.(ii) AD Category I banks are free to undertake

investments in overseas markets up to the limits

approved by their Board. Such investments may be


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made in overseas money market instruments and/or

debt instruments issued by a foreign state witha residual maturity of less than one year andrated at least as AA (-) by Standard & Poor /FITCH IBCA or Aa3 by Moody

s. For the purpose of

investments in debt instruments other than themoney market instruments of any foreign state,bank

s Board may lay down country ratings andcountry - wise limits separately wherevernecessary.NOTE: For the purpose of this clause,

moneymarket instrument

would include any debtinstrument whose life to maturity does notexceed one year as on the date of purchase.(iii) AD Category I banks may also invest theun-deployed FCNR (B) funds in overseas markets

in long-term fixed income securities subject tothe condition that the maturity of thesecurities invested in do not exceed thematurity of the underlying FCNR (B) deposits.(iv) Foreign currency funds representingsurpluses in the nostro accounts may be utilised

for:a) making loans to resident constituents formeeting their foreign exchange requirements orfor the Rupee working capital/capitalexpenditure needs subject to theprudential/interest-rate norms, credit

discipline and credit monitoring guidelines inforce.

b) extending credit facilities to Indian whollyowned subsidiaries/ joint ventures abroad inwhich at least 51 per cent equity is held by aresident company, subject to the guidelinesissued by Reserve Bank (Department of BankingOperations & Development).

(v) AD Category I banks may write-off/transferto unclaimed balances account, un-reconcileddebit/credit entries as per instructions issuedby Department of Banking Operations andDevelopment, from time to time.5. Loans/Overdraftsa) All categories of overseas foreign currencyborrowings of AD Category I banks, (except forborrowings at (c) below), including existingExternal Commercial Borrowings andloans/overdrafts from their Head Office,overseas branches and correspondents andoverdrafts in nostro accounts (not adjustedwithin five days), shall not exceed 50 per centof their unimpaired Tier I capital or USD 10

million (or its equivalent), whichever ishigher. The aforesaid limit applies to theaggregate amount availed of by all the offices


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and branches in India from all theirbranches/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 notadjusted within five days, a report, as per theformat in Annex-VIII, should be submitted to the

Chief General Manager, Reserve Bank of India,Foreign Exchange Department, Forex MarketsDivision, Central Office, Mumbai 400001, within15 days from the close of the month in which the

limit was exceeded. Such a report is notnecessary if arrangements exist for value

dating.

b) The funds so raised may be used for purposesother than lending in foreign currency toconstituents in India and repaid withoutreference to the Reserve Bank. As an exceptionto this rule, AD Category I banks are permittedto use borrowed funds as also foreign currencyfunds received through swaps for grantingforeign currency loans for export credit interms of IECD Circular No 12/04.02.02/2002-03dated January 31,2003. Any fresh borrowing above

this limit shall be made only with the priorapproval 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 50 per cent of unimpairedTier I capital or USD 10 million (or itsequivalent), whichever is higher:i). Overseas borrowings by AD Category I banksfor the purpose of financing export creditsubject to the conditions prescribed in IECDMaster Circular dated July 1, 2003 on ExportCredit in foreign currency.ii). Subordinated debt placed by head offices of

foreign banks with their branches in India asTier II capital.iii) Capital funds raised/augmented by the issue

of Innovative Perpetual Debt Instruments andDebt Capital Instruments, in foreign currency,in terms of Circulars DBOD. No.BP.BC.57/21.01.002/2005-06 dated January 25,2006 and DBOD. No. BP.BC.23/21.01.002/2006-07dated July 21, 2006

iv) any other overseas borrowing with thespecific approval of the Reserve Bank.d) Interest on loans/overdrafts may be remitted


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month.vii) AD Category-I banks are required to submita monthly report (as on the last Friday of every

month) on the limits granted and utilized bytheir constituents under the facility of booking

forward contracts on past performance basis, asper the format in Annex-X. The report may beforwarded to the Chief General Manager, ReserveBank of India, Foreign Exchange Department,Forex Markets Division, Central Office, AmarBuilding, 5th Floor, Mumbai-400 001 and bye-mail so as to reach the Department by the 10th

of the following month.viii) The Head/Principal Office of each ADCategory-I banks should submit a statement inform BAL giving details of their holdings of all

foreign currencies on fortnightly basis throughOnline Returns Filing System (ORFS) within seven

calendar days from the close of the reportingperiod to which it relates.ix) A monthly statement should be furnished tothe Chief General Manager, Reserve Bank ofIndia, Foreign Exchange Department, ForexMarkets Division, Central Office, Amar Building,

5th Floor Mumbai-400 001, before the 10th of the

succeeding month, in respect of cover taken byFIIs, indicating the name of the FII / fund, the

eligible amount of cover, the actual covertaken, etc. as per the format in Annex XIII.x) The Head/Principal Office of each ADCategory-I banks should furnish an up-to-datelist (in triplicate) of all itsoffices/branches, which are maintaining Rupeeaccounts of non-resident banks as at the end ofDecember every year giving their code numbersallotted by Reserve Bank. The list should besubmitted before 15th January of the followingyear to the Central Office of the Reserve Bank,Foreign Exchange Department, Trade Division,Amar Building 5th Floor, Mumbai 400 001. Theoffices/branches should be classified accordingto area of jurisdiction of Reserve Bank Officeswithin which they are situated.xi) AD Category I banks are required to submita quarterly report on the forward contractsbooked & cancelled by SMEs and ResidentIndividuals, to the Chief General Manager,Reserve Bank of India, Foreign ExchangeDepartment, Central Office, Forex Markets

Division, Amar Building, 5th Floor, Mumbai - 400

001 within the first week of the following


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month, as per format given in Annex XIV.

AppendixList of Circulars/Notifications which have beenconsolidated in the Master Circular on Risk

Management and Inter-Bank DealingsSr. No.Notification / CircularDate1.Notification No. FEMA 25/2000-RBMay 3, 20002.Notification No. FEMA 101/2003-RBOctober 3,20033.Notification No. FEMA 104/2003-RBOctober 21,20034.Notification No. FEMA 105/2003-RBOctober 21,20035.Notification No. FEMA 127/2005-RBJanuary 5,20056.Notification No. FEMA 143/ 2005-RBDecember 19,

20057.Notification No. FEMA 147/ 2006-RBMarch 16,20068.Notification No. FEMA 148/ 2006-RBMarch 16,20061.A.P (DIR Series) Circular No. 92April 4, 20032.A.P (DIR Series) Circular No. 93April 5, 20033.A.P (DIR Series) Circular No. 98April 29, 20034.A.P (DIR Series) Circular No.108June 21, 20035.A.P.(DIR Series) Circular No. 28October 17,20036.A.P.(DIR Series) Circular No. 46December 9,

20037.A.P.(DIR Series) Circular No. 47December 12,20038.A.P.(DIR Series) Circular No. 81March 24,

2004.9.A.P.(DIR Series) Circular No 26November 1,

200410.A.P.(DIR Series) Circular No 47June 23, 200511.A.P.(DIR Series) Circular No 03July 23, 200512.A.P.(DIR Series) Circular No 25March 6, 200613.EC.CO.FMD. No.8 /02.03.75/2002-03February 4,200314.EC.CO.FMD. No.14 /02.03.75/2002-03May 9, 200315.EC.CO.FMD.No.345/02.03.129(Policy)/2003-04November 5, 200316.FE.CO.FMD.1072/02.03.89/2004-05February 8,200517.FE.CO.FMD.2/02.03.129(Policy)/2005-06November 7, 200518.FE.CO.FMD 21921/02.03.75/2005-06April 17,

200619A.P.(DIR Series) Circular No.21December 13,200620A.P.(DIR Series) Circular No.22December 13,2006

21A.P.(DIR Series) Circular No.32February 8,2007

22A.P.(DIR Series) Circular No.52May 08, 2007


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rsk mgmt and inter bnk deals

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