RBI/2017-18/88 A.P. (DIR Series) Circular No. 11
November 09th, 2017
To, All Authorised Dealer Category - I Banks Madam/Sir,
Risk Management and Inter-Bank Dealings – Simplified Hedging Facility
Attention of Authorised Dealers Category – I (AD Category – I) banks is
invited to the Foreign Exchange Management (Foreign Exchange Derivative
Contracts) Regulations, 2000 dated May 3, 2000 (Notification No.FEMA. 25/RB-2000
dated May 3, 2000) issued under clause (h) of sub-section (2) of Section 47 of
FEMA, 1999 (Act 42 of 1999), as amended from time to time, the Master Direction
- Risk Management and Inter-Bank Dealings dated July 5, 2016, as amended from
time to time, and the announcement made in the Statement on Developmental and
Regulatory Policies Reserve Bank of India dated August 02, 2017 (para 7) on the
simplified hedging facility
2. The scheme of simplified hedging facility
was first announced by the RBI in August 2016 and the draft scheme was released
on April 12, 2017. The facility is being introduced with a view to simplify the
process for hedging exchange rate risk by reducing documentation requirements,
avoiding prescriptive stipulations regarding products, purpose and hedging
flexibility, and to encourage a more dynamic and efficient hedging culture.
3. Necessary amendments (Notification No. FEMA 388/2017-RB dated October 24,
2017) to Foreign Exchange Management (Foreign Exchange Derivatives Contracts)
Regulations, 2000 (Notification No. FEMA.25/RB-2000 dated May 3, 2000)
(Regulations) have been notified in the Official Gazette vide G.S.R.No.1324 (E)
dated October 24, 2017 a copy of which is given in the Annex II to this
circular. These regulations have been issued under clause (h) of sub-section (2)
of Section 47 of FEMA, 1999 (42 of 1999). The Master Direction on Risk
Management & Interbank dealings dated July 5, 2016, as amended from time to
time, has been updated accordingly.
4. The guidelines of this facility
are given in Annex I to this circular and this facility will be effective from
January 01, 2018.
5. AD Category – I banks may bring the contents of this
circular to the notice of their constituents and customers.
6. The
directions contained in this circular have been issued under Sections 10(4) and
11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without
prejudice to permissions/ approvals, if any, required under any other law.
Yours faithfully (T Rabi Sankar) Chief General Manager
[Annex I to A.P. (DIR Series) Circular No. 11 dated November 09, 2017]
Simplified Hedging Facility Guidelines
Users: Resident and non-resident entities, other than individuals.
Purpose: To hedge exchange rate risk on transactions, contracted or anticipated,
permissible under Foreign Exchange Management Act (FEMA), 19991.
Products: Any Over the Counter (OTC) derivative or Exchange Traded Currency
Derivative (ETCD) permitted under FEMA, 1999.
Cap on Outstanding
Contracts: USD 30 million, or its equivalent, on a gross basis.
Designated Bank: Any Authorised Dealer Category-I (AD Cat-I) bank designated as
such by the user.
Operational Guidelines, Terms and Conditions
i.
The user shall appoint an AD Cat-I bank as its “Designated Bank”. The designated
bank will assess the hedging requirement of the user and set a limit up to the
stipulated cap on the outstanding contracts.
ii. If hedging requirement
of the user exceeds the limit in course of time, the designated bank may
re-assess and, at its discretion, extend the limit up to 150% of the stipulated
cap.
iii. Hedge contracts in OTC market can be booked with any AD Cat-I
bank, provided the underlying cash flow takes place with the same bank.
iv. Cost reduction structures can be booked by users provided that resident
unlisted companies can use such structures only if they have a minimum net worth
of Rs.200 crores
v. Users are not required to furnish any documentary
evidence for establishing underlying exposure under this facility. Users may,
however, provide basic details of the underlying transaction in a standardised
format2, only in the case of OTC hedge contracts. vi. Cancelled contracts may
be freely rebooked with the same bank.
vii. In case of hedge contracts
booked in OTC market, while losses will be recovered from the user, net gains
i.e. gains in excess of cumulative losses, if any, will be transferred at the
time of delivery of the underlying cash flow. In case of part delivery, net
gains will be transferred on a pro-rata basis.
viii. For hedge contracts
on underlying capital account transactions, gains/losses may be transferred to
the user as and when they accrue if the underlying asset/liability is already in
existence.
ix. On full utilisation of the limit or in case of breach of
limit, user shall not book new contracts under this facility. In such a case,
contracts booked earlier under this facility will be allowed to continue till
they expire or are closed. Any further hedging requirements thereafter may be
booked under other available hedging facilities.
x. Users booking
contracts under this facility shall not book contracts under any other facility
in OTC or ETCD market except as provided in para (ix).
xi. At the end of
each financial year, the user will provide the designated bank with a statement
signed by the head of finance or the head of the entity, to the effect that,
Hedge contracts booked in both OTC and ETCD market, under this facility, are
backed by underlying exchange rate exposures, either contracted or anticipated.
The exposures underlying the hedge contracts booked under this facility are
not hedged under any other facility.
xii. On being appointed, the
designated bank shall report the details of the users and limits granted to the
Trade Repository (TR). On a request by the TR, the exchanges shall report all
contracts booked by such users to the TR on a daily basis.
xiii. The TR
will compute user wise outstanding position (across OTC and ETCD market) and
provide this information to the designated bank for monitoring. If the
outstanding contracts of a user exceeds the limit (or the extended limit, if
applicable) the designated bank shall advise the user to stop booking new
contracts under this facility.
xiv. When user migrates to other available
facilities, the designated bank shall report this information to the TR. The TR
shall update this information in its records and notify the recognized stock
exchanges to stop reporting data for the user concerned.
xv. Banks shall
have an internal policy regarding the time limit up to which a hedge contract
for a given underlying can be rolled-over or rebooked by the user.
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