|
Risk Management and Inter-Bank Dealings
Attention
of authorised dealers is invited to the Reserve Bank Notification No.FEMA/25/2000-RB
dated May 3, 2000.
2.
Directions relating to forward exchange cover and other derivative
products, Rupee Accounts of non-resident banks and inter-bank dealings, are
contained in the enclosure. These directions supercede the existing
instructions, namely:
i.
Chapter 3 (Part C & D and Annexure II) of ECM,
ii.
Chapter 5 (Part A & B and Annexure) of ECM,
iii.
Instructions contained in A.D.(M.A. Series) Circular No.1 dated January
19, 2000.
3.
Detailed guidelines contained in Part B and C of the enclosure are being
issued as required under Regulation 6 of the Reserve Bank Notification No.FEMA/5/2000-RB
dated May 3, 2000, which permits authorised dealers to keep deposits with his
branch, head office or correspondent outside India and also to accept deposit
kept by a branch or correspondent outside India of an authorised dealer and hold
in its books in India.
4.
Authorised dealers may bring the contents of this circular to the notice
of their constituents concerned.
5.
The directions contained in this circular have been issued under Section
10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999 (42 of
1999).
PART � A
RISK
MANAGEMENT
Section- I
Facilities
for Residents other than authorised dealers
(i)
Authorised dealers may enter into forward contracts with residents in
accordance with the provisions contained in paragraph 1 of Schedule I to Reserve
Bank Notification No. FEMA25/RB-2000 dated 3rd May 2000.
(ii)
While booking contracts for their constituents, authorised dealers should
verify suitable documentary evidence, irrespective of the underlying transaction
being a current account transaction or a capital account transaction, to ensure
that an exposure exists, to the extent of the amount of cover sought. Full
particulars of contract should be marked on such documents under proper
authentication and copies thereof retained for verification.
Authorised
dealers may also allow importers and exporters to book forward contract on the
basis of a declaration of an exposure and based on past performance subject to
the conditions prescribed by Reserve Bank of India in this regard.
A
forward contract cancelled with one authorised dealer can be rebooked with
another authorised dealer subject to the following conditions:
a.
the switch is warranted by competitive rates on offer, termination of
banking relationship with the authorised dealer with whom the contract was
originally booked, etc.
b.
the cancellation and rebooking are done simultaneously on the maturity
date of the contract.
c.
the responsibility of ensuring that the original contract which has been
cancelled rests with the authorised dealer who undertakes rebooking of the
contract.
(i)
Authorised dealers in India may enter into contracts other than forward
contracts with residents in India in accordance with the provisions contained in
paragraph 2 of Schedule I to the Reserve Bank Notification No. FEMA 25/RB -2000
dated 3rd May 2000.
(ii)
Authorised dealers 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 institutionalize the arrangements for a
quarterly review of operations and annual audit of transactions to verify
compliance with the regulations. The quarterly review reports and the annual
audit reports should be obtained from the concerned corporate by the authorised
dealers.
(iii) Authorised dealers may forward a report containing full
details of the transactions undertaken by residents in terms of Paragraph 2 of
Schedule 1 to the Regional Office of the Reserve Bank within whose jurisdiction
it is functioning, within a week of its conclusion.
(iv)
Foreign currency � rupee swaps between corporates who run long-term
foreign currency or rupee exposures may be arranged by authorised dealers
subject to the conditions prescribed by the Reserve Bank of India.
Note:
Authorised dealers should not allow the swap route to become a surrogate for
forward contracts for those who do not qualify for forward cover.
(i)
Authorised dealers in India may write cross currency options in
accordance with the provisions contained in paragraphs 2&3 of Schedule I to
the Reserve Bank Notification No FEMA 25/RB-2000 dated 3rd May 2000.
(ii)
Option should be written on a fully covered back-to-back basis. The cover
transaction may be undertaken with a bank outside India, or an internationally
recognized option exchange or another authorised dealer in India.
(iii) Authorised dealers desirous of writing options, should
obtain one time approval, before undertaking the business, from the Chief
General Manager, Exchange Control Department, (Forex Markets Division), Reserve
Bank of India, Central Office, Mumbai, 400001.
(i)
Residents in India, engaged in import and export trade, may hedge the
price risk of commodities in the international commodity exchanges/ markets.
Applications for commodity hedging may be forwarded to the Reserve Bank through
the International Banking Division of an authorised dealer giving the details
laid down in Schedule III to the Reserve Bank Notification No. FEMA 25/RB -2000
dated 3rd May 2000. A one-time approval will be given by Reserve Bank
along with the guidelines for undertaking this activity.
(ii)
Authorised Dealers have to submit a monthly statement to RBI giving the
details of the hedging activities undertaken by their clients. They also have to
certify that all hedging positions were supported by underlying physical
exposures.
(i)
Designated branches of authorised dealers maintaining accounts of FIIs
provide forward cover to such customers subject to the conditions set down in
paragraph 1 of Schedule II to the Reserve Bank Notification No. FEMA 25/RB-2000
dated 3rd May 2000.
(ii)
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 underlying exposure.
(iii) A monthly statement should be furnished to the Chief
General Manager, Reserve Bank of India, Exchange Control Department (Forex
Markets Division), Central Office, Mumbai-400 001 before the 10th of the
succeeding month indicating the name of the FII / fund, the eligible amount of
cover and the actual cover taken.
Authorised
Dealers may enter into forward contracts with NRIs/OCBs as per the guideline set
down in paragraph 2 of Schedule II to the Reserve Bank Notification No. FEMA 25/RB
-2000 dated 3rd May 2000.
Section
II
Facilities for Authorised Dealers
Authorised
dealers may use the following instruments to hedge their assets-liability
portfolio
i.
Interest rate swaps,
ii.
Currency swaps, and
iii.
Forward rate agreements.
Authorised
dealers may also purchase call or put options to hedge their cross currency
proprietary trading positions.
The
use of these instruments is subject to the following conditions:
(a)
An appropriate policy in this regard is approved by their top management.
(b)
The value and maturity of the hedge should not exceed that of the
underlying
(c)
No �stand alone� transactions can be initiated. If a hedge becomes
naked in part or full owing to shrinking of the portfolio, it may be allowed to
continue till the original maturity and should be marked to market at regular
intervals.
(d)
The net cash flows arising out of these transactions are booked as income
and expenditure and reckoned as exchange position wherever applicable.
Banks
authorised by Reserve Bank to operate the Gold Deposit Scheme may use
Exchange-traded 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.
PART
-B
Accounts
of Non-resident Banks
(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.
(iii) In the case of individual payments of USD 10000 or more,
the purpose of remittance as given by the recipient should be reported in the
statement annexed to R Return.
(iv)
Authorised dealers may issue encashment certificates in accordance with
the procedures laid down.
(i)
Banks may open/ close rupee accounts (non-interest bearing) in the names
of their overseas branches or correspondents without prior reference to Reserve
Bank. Opening of rupee accounts in the names of branches of Pakistani banks
operating outside Pakistan requires specific approval of Reserve Bank.
(ii)
The Head/ Principal Office of each bank should furnish an up-to-date list
(in triplicate) of all its offices/branches, which are maintaining rupee account
of non-resident 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 Reserve Bank (Central
Statistical Division). The offices/ branches should be classified according to
area of jurisdiction or Reserve Bank Offices within which they are situated.
All
debits/ credits to the accounts of non-resident banks should be reported in Form
A3.
(i)
Banks 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 bona fide 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:
A.
Forward purchase or sale of foreign currencies against rupees for funding is
prohibited.
B.
Offer of two-way quotes to non-resident banks is also prohibited.
Transfer
of funds between the accounts of the same bank or different banks is freely
permitted.
Balances
held in Rupee accounts of non-resident banks may be freely converted into
foreign currency. All such transactions should be reported in Form A2 and the
corresponding debit to the account should be in form A3 under the relevant R
Returns.
In
the case of credit to accounts the paying banker should ensure that all Control
requirements are met and are correctly furnished in Form A1/ A2 as the case may
be. The receiving banker after ensuring that the funds are eligible for credit
should submitted Form A1/A2 under cover of the R Return.
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.
(i)
Banks may permit their overseas branches/ correspondents� temporary
overdrawals not exceeding Rs.500 lakhs in the aggregate, for meeting normal
business requirements. The limit applies to the amount outstanding against all
overseas branches and correspondents in the books of all the branches of the
bank 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 Reserve Bank (Forex Markets
Division) within 15 days from the close of the month, stating the reasons
therefore. Such a report is not necessary if arrangement exist for value dating.
(ii)
Banks 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, Exchange Control Department (Forex Markets Division)
Central Office, Mumbai.
Opening
of rupee accounts in the names of exchange houses for facilitating private
remittances into India requires approval of Reserve Bank. Remittances through
exchange houses for financing trade transactions are permitted upto Rs.2, 00,000
per transaction.
PART
-C
Inter-Bank
Foreign Exchange Dealings
The
Board of Directors of authorised dealers should frame an appropriate policy and
fix suitable limits for various Treasury functions.
The
overnight open exchange position (vide Annexure I) and the aggregate gap limits
are required to be approved by the Reserve Bank.
Subject
to compliance with the provisions of paragraphs C.1 and C.2, authorised dealers
may freely undertake foreign exchange transactions as under:
a)
With authorised dealers in India:
(i)
Buying/ Selling/ Swapping foreign currency against rupees or another
foreign currency
(ii)
Placing/ Accepting deposits and Borrowing/ Lending in foreign currency.
b)
With banks overseas:
(i)
Buying/ Selling/ Swapping foreign currency against another foreign
currency to cover client transactions or for adjustment of own position
(ii)
Initiating trading positions in the overseas markets subject to Reserve
Bank approval. Applications in this regard should be made to the Chief General
Manager, Exchange Control Department (Forex Markets Division), Reserve Bank of
India, Central Office, Mumbai 400001.
Note:
A)
Funding of accounts of Non-resident banks - Refer to paragraph B.4.
B)
Form A2 need not be completed for sales in the inter-bank market but all such
transactions should be reported to Reserve Bank in R Returns.
(i)
Inflows into foreign currency accounts arise primarily from
client-related transactions, swap deals, deposits, borrowings etc. Banks 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 Reserve Bank.
(ii)
Banks may invest up to 15% of their unimpaired Tier I capital or US$ 10
million whichever is higher, and the entire amount representing un-deployed
foreign currency deposit liabilities 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 as A-1+/AAA by Standard and Poor or P-1/ Aaa by Moody's or
F1+ /AAA by Fitch IBCA. For the purpose of investments in debt instruments other
than money market instruments of any foreign state, bank�s board may lay down
country rating wise limit separately wherever necessary.
Note:
For the purpose of this clause, 'money market instrument' would mean any debt
instrument whose life to maturity does not exceed one year as on the date of
purchase.
(iii)
Foreign currency funds representing deposit liabilities 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% equity is held by a resident company,
subject to the guidelines issued by Reserve Bank (Department of Banking
Operations & Development).
iv)
Banks 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.
(i)
Banks may avail of loans/overdrafts from their overseas branches and
correspondents up to 15% of their unimpaired Tier-I capital or US$ 10 million or
its equivalent, whichever is higher. The funds may be used for purposes other
than lending in foreign currencies and repaid without reference to Reserve Bank.
The aforesaid limit applies to the aggregate amount availed by all the offices
and branches in India from all their branches/correspondents abroad. If drawals
in excess of the above limit are not adjusted within five days, a report should
be submitted to the Chief General Manager, Reserve Bank of India Exchange
Control Department, Forex Markets Division, Amar Building, Fort, 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.
(ii)
Banks may avail of loans in excess of the limits prescribed in
sub-paragraph (i) above solely for replenishing their rupee resources in India
without prior approval of Reserve Bank. Such rupee funds may be used only for
financing the banks� normal business operations and should not be deployed in
the call money etc. markets. A report on each borrowing should be immediately
forwarded to the Forex Market Division, in the Central Office of Reserve Bank
whose prior permission will be required for repayment of such loans. Such
permission will be given only if the bank has no borrowings outstanding either
from Reserve Bank or other bank/ financial institution in India and is clear of
all money market borrowings for a period of at least four weeks before the
repayment.
(iii)
Interest on loans/overdrafts may be remitted (net of taxes) without the
prior approval of Reserve Bank.
(i)
The Head/ Principal Office of each authorised dealer should submit to the
Chief General Manager, Exchange Control Department (Forex Markets Division),
Reserve Bank of India, Central Office, Mumbai 400 001 daily statements of
foreign exchange turnover in Form FTD and Gaps position and cash balances in
Form GPB as per Annexure ll. The statements should be transmitted online through
wide area network.
(ii)
The Head/ Principal Office of each authorised dealer should submit a
statement in duplicate in form BAL giving details of their holdings of all
foreign currencies on fortnightly basis so as to reach the Regional Office of
Reserve Bank under whose jurisdictions the Head/ Principal Office is situated
within seven calendar days from the close of the reporting to which it relates.
ANNEXURE
I
(See
paragraph C.2)
Guidelines
for Foreign Exchange Exposure Limits of Authorised Dealers
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. For foreign
banks, the limits will cover only their branches in India.
2.
Capital
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). For the present this is relevant for foreign branches
of Indian banks.
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:
i.
Calculate the net open position in each currency (paragraph 3 above).
ii.
Convert the net position into rupees at the FEDAI indicative spot rates
for the day
iii.
Arrive at the sum of all the net short positions.
iv.
Arrive at the sum of all the net long positions.
Overall
net foreign exchange position is the higher of (iii) and (iv). The overall net
foreign exchange position arrived at as above must be kept within the limit
approved by Reserve Bank.
5.
Capital Requirement
As
prescribed by Reserve Bank from time to time.
ANNEXURE
II
FTD
(See
Paragraph C.6)
Statement
showing daily turnover of foreign exchange
|
|
|
Merchant
|
Inter
bank
|
|
|
|
Spot,
Cash, Ready, T.T. etc.
|
Forward
|
Cancellation
of Forwards
|
Spot
|
Swap
|
Forwards
|
|
FCY/INR
|
Purchase
from
|
|
|
|
|
|
|
|
|
Sales
to
|
|
|
|
|
|
|
|
FCY/FCY
|
Purchase
from
|
|
|
|
|
|
|
|
|
Sales
to
|
|
|
|
|
|
|
GPB
(See
paragraph C.6)
Statement showing gaps, position and cash
balances
US
Dollars Balances
:
IN USD MILLION
(Cash
Balance + All Investments)
Net
Open Exchange Position (Rs.)
:
O/B(+)/O/S(-) IN Rs.CRORE
Of
the above FCY/INR
:
IN RS. CRORE
AGL
maintained
:
VaR maintained:
US
DOLLAR MATURITY MISMATCH IN MILLION
|
1
month
|
2
months
|
3
months
|
4
months
|
5
months
|
6
months
|
>6
months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|