RBI/2013-14/649
A .P. (DIR Series) Circular No. 147
June 20, 2014
To
All Category - I Authorised Dealer banks
Madam / Sir,
Risk Management and Inter-bank Dealings: Guidelines relating to
participation of Residents in the Exchange Traded Currency Derivatives (ETCD)
market
Attention of Authorized 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), as amended from time to time, the Currency
Futures (Reserve Bank) Directions, 2008 dated August 6, 2008 and Exchange Traded
Currency Options (Reserve Bank) Directions, 2010 dated July 30, 2010 as amended
from time to time and also
AP (Dir Series) circular No.5 dated August 6, 2008
and
No.5 dated July 30, 2010 in terms of which persons resident in India may
participate in the ETCD market in India subject to the terms and conditions
mentioned in the aforementioned notifications and guidelines, ibid. Attention is
also drawn to
A.P. (DIR Series) circular No. 86 dated March 1, 2013 and
A.P.
(DIR Series) circular no. 7 dated July 8, 2013 in terms of which restrictions on
the proprietary trading by AD Category – I banks in the currency futures and
ETCD markets were imposed.
- In terms of the present regulatory framework, domestic participants in the
currency futures and exchange traded options markets are not required to have
any underlying exposure while requirement of underlying is mandatory for taking
a position in the over-the-counter (OTC) derivatives markets. With a view to
bringing about an alignment between the two markets, henceforth domestic
participants in the currency futures and exchange traded currency options will
be subject to the following terms and conditions:
a. Domestic participants shall be allowed to take a long (bought) as well as
short (sold) position upto USD 10 million per exchange without having to
establish the existence of any underlying exposure. For the purpose of
convenience, exchanges may prescribe a fixed limit for the contracts in
currencies other than USD such that the limit is within the equivalent of USD 10
million.
b. Domestic participants who want to take a position exceeding USD 10 million in
the ETCD market will have to establish the existence of an underlying exposure.
The procedure for the same shall be as under:
- For participants who are exporters or importers of goods and services, the
eligible limit up to which they can take appropriate hedging positions in ETCDs
will be determined as (a) higher of the (I) average of the last three years’
export turnover, or (II) previous year’s export turnover, in case they are
exporters and (b) fifty per cent of the higher of the (I) average of their last
three years’ imports turnover or (II) the previous year’s turnover, in case they
are importers.
- The participants shall furnish, to the trading member of the exchange, a
certificate(s) from their statutory auditors regarding the limit(s) mentioned
above along with an undertaking signed by the Chief Financial Officer (CFO) to
the effect that at all time, the sum total of the outstanding OTC derivative
contracts and the outstanding ETCD contracts shall be corresponding to the
actual exports or imports contracted, as the case may be.
- Based on the above certificate, a trading member can book ETCD contracts upto
fifty per cent of the eligible limit [as at paragraph (i) above] on behalf of
the concerned customer. If a participant wishes to take position beyond the
fifty per cent of the eligible limit in the ETCD, it has to produce a
certificate from the statutory auditors certifying that the sum total of the
outstanding OTC derivative contracts and outstanding ETCD contracts has
generally been in correspondence with the eligible limits. Based on such a
certificate, the trading member can book ETCD contracts beyond fifty per cent of
the limit and up to limit mentioned in paragraph (i) above.
- For all other participants having an underlying foreign currency exposure in
respect of both current and capital account transactions as also exporters and
importers who wish to access the ETCD market on the basis of contracted
exposure, they will have to undertake the transaction through AD Category-I
bank/s who are operating as trading members. In such cases, the responsibility
for verification of the underlying exposures and ensuring that the ETCD
bought/sold is in conformity with the underlying exposure and that no OTC
contract has been booked against the same underlying exposure shall rest with
the concerned (AD Category I bank) trading member.
- All participants in the ETCD market, except those covered by paragraph (iv)
above, will be required to submit to the concerned trading member of the
exchange a half-yearly certificate from their statutory auditors as on March
31st and September 30th, within fifteen days from the said dates, to the effect
that during the preceding six months, the derivative contracts entered into by
the participant in the OTC and the ETCD markets put together did not exceed the
actual exposure.
c. It may be noted that the onus of complying with the provisions of this
circular rests with the participant and in case of any contravention the
participant shall render itself liable to any action that may be warranted as
per the provisions of Foreign Exchange Management Act, 1999 and those of the
Regulations, Directions, etc. framed thereunder.
- In terms of
A.P. (DIR Series) Circular 86 dated March 1, 2013, AD Cat-I banks
were not allowed to offset their positions in the ETCD market against the
positions in the OTC derivatives market and in terms of
A.P. (DIR Series)
Circular No. 7 dated July 8, 2013 they were not allowed to carry out any
proprietary trading in the ETCD market. Keeping in view the evolving market
conditions, it has now been decided that:
- AD Category-I banks may undertake proprietary trading in the ETCD market within
their Net Open Position Limit (NOPL) and any limit that may be imposed by the
exchanges for the purpose of risk management and preserving market integrity.
- AD Category-I banks may also net / offset their positions in the ETCD market
against the positions in the OTC derivatives markets. Keeping in view the
volatility in the foreign exchange market, Reserve Bank may however stipulate a
separate sub-limit of the NOPL (as a percentage thereof) exclusively for the OTC
market as and when required.
- Save and except as mentioned above, there will be no other upper limit on the
position that can be taken by any participant, resident or non-resident, in the
ETCD market. The exchanges under appropriate directions from SEBI may however
impose any limit for risk management and preserving market integrity.
- This circular has been issued under Sections 10 (4) and 11(1) of the Foreign
Exchange Management Act, 1999 (42 of 1999) and is without prejudice to
permissions / approvals, if any, required under any other law.
Yours faithfully,
(C D Srinivasan)
Chief General Manager
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