Reserve Bank Of India
A. P. (DIR Series) Circular No. 86
March 1, 2013
To,
All Authorised Dealer Category - I Banks
Madam / Sir,
Risk Management and Inter-Bank Dealings
Attention of Authorized Dealers Category – I (AD Category – I) banks is invited
to
A.P. (DIR Series) Circular No.92 dated April 4, 2003 issued on Risk
Management and Inter-Bank Dealings.
- As per para C.2 of the above mentioned circular “The overnight open exchange
position and the aggregate gap limits are required to be approved by Reserve
Bank." Further, Annex I of the said circular provided the detail guidelines for
the Foreign Exchange Exposure Limits of the Authorised Dealers.
- In view of the various developments in the forex markets a group comprising
officials of Reserve Bank of India, representatives of select banks and the
Foreign Exchange Dealers Association of India (FEDAI) went into the various
issues involved in the guidelines relating to the Foreign Exchange Exposure
Limits of Authorised Dealers. Based on the recommendations of the group, it has
been decided to revise the existing guidelines on calculation of the Foreign
Exchange Exposure Limits of the Authorised Dealers. The revised guidelines are
provided in the
Annex.
- Further, for the present , it has been decided to withdraw the restrictions
placed on open positions limit of the Authorised Dealers involving Rupee as one
of the currencies, (on both overnight and intra-day open positions) vide
A.P.
(Dir Series) Circular No.58 dated 15th December 2011. Consequently, the
instructions issued vide
A.P. (Dir Series) Circular No.129 dated 21st May 2012
and
A.P. (Dir Series) Circular No. 13 dated 31st July 2012 also stand withdrawn.
- Until further review, the following instructions shall however continue to be
effective:
- The positions in the exchanges (both Futures and Options) cannot be
netted/offset by undertaking positions in the OTC market and vice-versa. The
positions initiated in the exchanges shall be liquidated/closed in the exchanges
only.
- The position limit for the trading member AD Category-I bank in the exchanges
for trading Currency Futures and Options shall be US$ 100 million or 15 per cent
of the Outstanding open interest, whichever is lower.
- 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,
(Rudra Narayan Kar)
Chief General Manager- in-Charge
RBI/2012-13/426
Annex
- Guidelines for Foreign Exchange Exposure Limits of Authorised Dealers
Category – I
The Foreign Exchange Exposure Limits of Authorised Dealers would be dual in
nature.
- Net Overnight Open Position Limit (NOOPL) for calculation of capital charge on
forex risk
- Limit for positions involving Rupee as one of the currencies (NOP-INR) for
exchange rate management.
For banks incorporated in India , the exposure limits fixed by the Board should
be the aggregate for all branches including their overseas branches and
Off-shore Banking Units. For foreign banks, the limits will cover only their
branches in India.
- Net Overnight Open Position Limit (NOOPL) for calculation of capital charge
on forex risk
NOOPL may be fixed by the boards of the respective banks and communicated to the
Reserve Bank immediately. However, such limits should not exceed 25 percent of
the total capital (Tier I and Tier II capital) of the bank.
The Net Open position may be calculated as per the method given below:
- 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.
- 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.
- 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:
- spot transactions which are not yet settled;
- forward transactions;
- Guarantees and similar commitments denominated in foreign currencies which are
certain to be called;
- Net future income/expenses not yet accrued but already fully hedged (at the
discretion of the reporting bank);
- Net of amounts to be received/paid in respect of currency futures, and the
principal on currency futures/swaps.
- Net Options Position
The options position is the "delta-equivalent" spot currency position as
reflected in the authorized dealer's options risk management system, and
includes any delta hedges in place which have not already been included under
1(a) or 1(b) (i) and (ii) above.
- 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:
- Calculate the net open position in each currency (paragraph 1 above).
- Calculate the net open position in gold.
- Convert the net position in various currencies and gold into Rupees in
terms of existing RBI / FEDAI Guidelines. All derivative transactions including
forward exchange contracts should be reported on the basis of Present Value (PV)
adjustment.
- Arrive at the sum of all the net short positions.
- Arrive at the sum of all the net long positions.
Overall net foreign exchange position is the higher of (iv) or (v). The overall
net foreign exchange position arrived at as above must be kept within the limit
approved by the bank’s Board.
Note: Authorised Dealer banks should report all derivative transactions
including forward exchange contracts on the basis of PV adjustment for the
purpose of calculation of the net open position. Authorised Dealer banks may
select their own yield curve for the purpose of PV adjustments. The banks
however should have an internal policy approved by its ALCO regarding the yield
curve/(s) to be used and apply it on a consistent basis.
- Offshore exposures
For banks with overseas presence, the offshore exposures should be calculated on
a standalone basis as per the above method and should not be netted with onshore
exposures. The aggregate limit (on-shore + off-shore) may be termed Net
Overnight open Position (NOOP) and will be subjected to capital charge.
Accumulated surplus of foreign branches need not be reckoned for calculation of
open position. An illustrative example is as follows:
If a bank has, let us say three foreign branches and the three branches have
open position as below-
Branch A: + Rs 15 crores
Branch B: + Rs 5 crores
Branch C: - Rs 12 crores
The open position for the overseas branches taken together would be Rs 20 crores
- Capital1 Requirement
As prescribed by the Reserve Bank from time to time
- Other Guidelines
- ALCO / Internal Audit Committee of the Authorized Dealers should monitor the
utilization of and adherence to the limits.
- Authorized Dealers should also have a system in place to demonstrate,
whenever required, the various components of the NOOP as prescribed in the
guidelines for verification by the Reserve Bank.
- Transactions undertaken by Authorized Dealers till the end of business day
may be computed for calculation of Foreign Exchange Exposure Limits. The
transactions undertaken after the end of business day may be taken into the
positions for the next day. The end of day time may be approved by the bank’s
Board.
- Limit for positions involving Rupee as one of the currencies (NOP-INR) for
exchange rate management
- NOP-INR may be prescribed to Authorised Dealers at the discretion of the Reserve
Bank of India depending on the market conditions.
- The NOP-INR positions may be calculated by netting off the long & short onshore
positions (as arrived at by the short hand method) plus the net INR positions of
offshore branches.
- Positions undertaken by banks in currency futures / options traded in exchanges
will not form part of the NOP-INR.
- As regards option position, any excesses on account of large option Greeks
during volatile market closing / revaluations may be treated as technical
breaches. However, such breaches are to be monitored by the banks with proper
audit trail. Such breaches should also be regularized and ratified by
appropriate authorities (ALCO / Internal Audit Committee).
- Aggregate Gap Limits (AGL)
- AGL may be fixed by the boards of the respective banks and communicated to
the Reserve Bank immediately. However, such limits should not exceed 6 times the
total capital (Tier I and Tier II capital) of the bank.
- However, Authorised Dealers which have instituted superior measures such as
tenor wise PV01 limits and VaR to aggregate foreign exchange gap risks are
allowed to fix their own PV01 and VaR limits based on their capital, risk
bearing capacity etc. in place of AGL and communicate the same to the Reserve
Bank. The procedure and calculation of the limit should be clearly documented as
an internal policy and strictly adhered to.
1 Capital refers to Tier I capital as per instructions issued by Reserve Bank of
India (Department of Banking Operations and Development).