Master Circular on Risk Management and Inter-Bank Dealings - ਆਰਬੀਆਈ - Reserve Bank of India
Master Circular on Risk Management and Inter-Bank Dealings
RBI/2011-12/12 July 1, 2011 To, All Authorised Dealers - Category I Banks Madam / Sir, Master Circular on Risk Management and Inter-Bank Dealings Foreign Exchange Derivative Contracts, Overseas Commodity & Freight Hedging, Rupee Accounts of Non-Resident Banks, Inter-Bank Foreign Exchange Dealings, etc. are governed by the provisions in Notification No. FEMA 1/2000-RB, Regulation 4(2) of Notification No. FEMA 3/RB-2000 and Notification No. FEMA 25/RB-2000 dated May 3, 2000 and subsequent amendments thereto. 2. This Master Circular consolidates the existing instructions on the subject of "Risk Management and Inter-Bank Dealings" at one place. The list of underlying circulars/notifications is set out in Appendix. 3. This Master Circular is issued with a sunset clause of one year. This circular will stand withdrawn on July 1, 2012 and would be replaced by an updated Master Circular on the subject. Yours faithfully, (Meena Hemchandra)
PART – A SECTION I Facilities for Persons Resident in India other than Authorised Dealers Category-I The facilities for persons resident in India (other than AD Category I banks) are elaborated under paragraphs A and B. Paragraph A describes the products and operational guidelines for the respective product. In addition to the operational guidelines under A, the general instructions that are applicable across all products for residents (other than AD Category I banks) are detailed under Paragraph B. A. Products and Operational Guidelines The product/purpose-wise facilities for persons resident in India (other than AD Category I banks) are detailed under the following subheads: 1) Contracted Exposure 1) Contracted Exposures AD Category I banks have to evidence the underlying documents so that the existence of underlying foreign currency exposure can be clearly established. AD Category I banks, through verification of documentary evidence, should be satisfied about the genuineness of the underlying exposure, irrespective of the transaction being a current or a capital account. Full particulars of the contracts should be marked on the original documents under proper authentication and retained for verification. However, in cases where the submission of original documents is not possible, a copy of the original documents, duly certified by an authorized official of the user, may be obtained. In either of the cases, before offering the contract, the AD Category I banks should obtain an undertaking from the customer and also quarterly certificates from the statutory auditor (for details refer para B (b) for General Instructions). While details of the underlying have to be recorded at the time of booking the contract, in the view of logistic issues, a maximum period of 15 days may be allowed for production of the documents. If the documents are not submitted by the customer within 15 days, the contract may be cancelled, and the exchange gain, if any, should not be passed on to the customer. In the event of non-submission of the documents by the customer within 15 days on more than three occasions in a financial year, booking of permissible derivative contracts in future may be allowed only against production of the underlying documents, at the time of booking the contract. The products available under this facility are as follows: i) Forward Foreign Exchange Contracts Participants
Purpose a) To hedge exchange rate risk in respect of transactions for which sale and /or purchase of foreign exchange is permitted under the FEMA 1999, or in terms of the rules/ regulations/directions/orders made or issued there under. b) To hedge exchange rate risk in respect of the market value of overseas direct investments (in equity and loan).
c) To hedge exchange rate risk of transactions denominated in foreign currency but settled in INR, including hedging the economic (currency indexed) exposure of importers in respect of customs duty payable on imports.
Operational Guidelines, Terms and Conditions General principles to be observed for forward foreign exchange contracts.
ii) Cross Currency Options (not involving Rupee) Participants
Purpose
Operational Guidelines, Terms and Conditions
iii) Foreign Currency - INR Options Participants
Purpose
Operational Guidelines, Terms and Conditions
iv) Foreign Currency-INR Swaps Participants Market-makers – AD Category I banks in India. Users –
Purpose To hedge exchange rate and/or interest rate risk exposure for those having long-term foreign currency borrowing or to transform long-term INR borrowing into foreign currency liability. Operational Guidelines, Terms and Conditions
v) Cost Reduction Structures i.e. cross currency option cost reduction structures and foreign currency –INR option cost reduction structures. Participants Market-makers - AD Category I banks Users – Listed companies and their subsidiaries/joint ventures/associates having common treasury and consolidated balance sheet or unlisted companies with a minimum net worth of Rs. 200 crore provided
(Note: The above accounting treatment is a transitional arrangement till AS 30 / 32 or equivalent standards are notified.)” Purpose To hedge exchange rate risk arising out of trade transactions and External Commercial Borrowings (ECBs). Operational Guidelines, Terms and Conditions
vi) Hedging of Borrowings in foreign exchange, which are in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000. Products – Interest rate swap, Cross currency swap, Coupon swap, Cross currency option, Interest rate cap or collar (purchases), Forward rate agreement (FRA) Participants Market-makers –
Users – Persons resident in India who have borrowed foreign exchange in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000. Purpose For hedging interest rate risk and currency risk on loan exposure and unwinding from such hedges Operational Guidelines, Terms and Conditions
2) Probable exposures based on past performance Participants
Purpose To hedge currency risk on the basis of a declaration of an exposure and based on past performance up to the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. Probable exposure based on past performance can be hedged only in respect of trades in merchandise goods as well as services. Products Forward foreign exchange contracts, cross currency options (not involving the rupee), foreign currency-INR options and cost reduction structures [as mentioned in section B para I 1(v)]. Operational Guidelines, Terms and Conditions a) Corporates having a minimum net worth of Rs 200 crores and an annual export and import turnover exceeding Rs 1000 crores and satisfying all other conditions as stipulated in section B para I 1(v) may be allowed to use cost reduction structures. b) The contracts booked during the current financial 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’ actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. c) Contracts booked in excess of 75 per cent of the eligible limit will be on deliverable basis and cannot be cancelled. d) These limits shall be computed separately for import/export transactions. e) Higher limits will be permitted on a case-by-case basis on application to the Foreign Exchange Department, Central Office, Reserve Bank of India. The additional limits, if sanctioned, shall be on a deliverable basis. f) Any contract booked without producing documentary evidence will be marked off against this limit. These contracts once cancelled, are not eligible to be rebooked. Rollovers are also not permitted. g) AD banks should permit their clients to use the past performance facility only after satisfying themselves that the following conditions are complied with:
h) The past performance limits once utilised are not to be reinstated either on cancellation or on maturity of the contracts. i) AD Category I banks must arrive at the past performance limits at the beginning of every financial year. The drawing up of the audited figures (previous year) may require some time at the commencement of the financial year. However, if the statements are not submitted within three months from the last date of the financial year, the facility should not be provided until submission of the audited figures. j) AD Category I banks must institute appropriate systems for validating the past performance limits at pre-deal stage. In addition to the customer declarations, AD Category I banks should also assess the past transactions with the customers, turnover, etc. k) AD Category I banks are required to submit a monthly report (as on the last Friday of every month) on the limits granted and utilised by their constituents under this facility as prescribed in Annex X. 3) Special Dispensation i) Small and Medium Enterprises (SMEs) Participants
Purpose To hedge direct and / or indirect exposures of SMEs to foreign exchange risk Product Forward foreign exchange contracts Operational Guidelines: Small and Medium Enterprises (SMEs) having direct and / or indirect exposures to foreign exchange risk are permitted to book / cancel / rebook/ roll over forward contracts without production of underlying documents to manage their exposures effectively, subject to the following conditions:
ii) Resident Individuals Participants
Purpose To hedge their foreign exchange exposures arising out of actual or anticipated remittances, both inward and outward, can book forward contracts, without production of underlying documents, up to a limit of USD 100,000, based on self declaration. Product Forward foreign exchange contracts Operational Guidelines, Terms and Conditions
B. General Instructions for OTC forex derivative contracts entered by Residents in India While the guidelines indicated above govern specific foreign exchange derivatives, certain general principles and safeguards for prudential considerations that are applicable across the OTC foreign exchange derivatives, are detailed below. In addition to the guidelines under the specific foreign exchange derivative product, the general instructions should be followed scrupulously by the users (residents in India other than AD Category I banks) and the market makers (AD Category I banks).
4. Currency Futures on recognised Stock /New Exchanges As part of further developing the derivatives market in India and adding to the existing menu of foreign exchange hedging tools available to the residents, currency futures contracts have been permitted to be traded in recognized stock exchanges or new exchanges, recognized by the Securities and Exchange Board of India (SEBI) in the country. The currency futures market would function subject to the directions, guidelines, instructions issued by the Reserve Bank and the SEBI, from time to time. Persons resident in India are permitted to participate in the currency futures market in India subject to directions contained in the Currency Futures (Reserve Bank) Directions, 2008 [Notification No.FED.1/DG(SG)-2008 dated August 6, 2008] (Directions) and Notification No.FED. 2 / ED (HRK)-2009 dated January 19, 2010 issued by the Reserve Bank of India, which have been issued under Section 45W of the Reserve Bank of India Act, 1934. Currency futures are subject to following conditions: 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’ may purchase or sell currency futures contracts to hedge an exposure to foreign exchange rate risk or otherwise. Features of currency futures Standardized currency futures shall have the following features: a. USD-INR, EUR-INR, GBP-INR and JPY-INR contracts are allowed to be traded. Membership (i) The membership of the currency futures market of a recognised stock exchange shall be separate from the membership of the equity derivative segment or the cash segment. Membership for both trading and clearing, in the currency futures market shall be subject to the guidelines issued by the SEBI. (ii) Banks authorized by the Reserve Bank under section 10 of the Foreign Exchange Management Act, 1999 as ‘AD Category - I bank’ are permitted to become trading and clearing members of the currency futures market of the recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfilling the minimum prudential requirements. (iii) AD Category - I banks which do not meet the above minimum prudential requirements and AD Category - I banks which are Urban Co-operative banks or State Co-operative banks can participate in the currency futures market only as clients, subject to approval therefore from the respective regulatory Departments of the Reserve Bank. Position limits i. The position limits for various classes of participants in the currency futures market shall be subject to the guidelines issued by the SEBI. ii. The AD Category - I banks, shall operate within prudential limits, such as Net Open Position (NOP) and Aggregate Gap (AG) limits. The exposure of the banks, on their own account, in the currency futures market shall form part of their NOP and AG limits. Risk Management measures The trading of currency futures shall be subject to maintaining initial, extreme loss and calendar spread margins and the Clearing Corporations / Clearing Houses of the exchanges should ensure maintenance of such margins by the participants on the basis of the guidelines issued by the SEBI from time to time. Surveillance and disclosures The surveillance and disclosures of transactions in the currency futures market shall be carried out in accordance with the guidelines issued by the SEBI. Authorisation to Currency Futures Exchanges/Clearing Corporations Recognized stock exchanges and their respective Clearing Corporations / Clearing Houses shall not deal in or otherwise undertake the business relating to currency futures unless they hold an authorization issued by the Reserve Bank under section 10(1) of the Foreign Exchange Management Act, 1999. 5. Currency Options on recognised Stock /New Exchanges In order to expand the existing menu of exchange traded hedging tools available to the residents, plain vanilla currency options contracts have been permitted to be traded in recognized stock exchanges or new exchanges, recognized by the Securities and Exchange Board of India (SEBI) in the country. Exchange traded Currency options are subject to following conditions : Permission (i) Exchange traded Currency option contracts are permitted in US Dollar (USD) - Indian Rupee (INR). Features of exchange traded currency options Standardized exchange traded currency options shall have the following features:
Membership i) Members registered with the SEBI for trading in currency futures market shall be eligible to trade in the exchange traded currency options market 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 under section 10 of the Foreign Exchange Management Act, 1999 as ‘AD Category - I bank’ are permitted to become trading and clearing members of the exchange traded currency options market of the recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:
The AD Category - I banks, which fulfil the prudential requirements, should lay down detailed guidelines with the approval of their Boards for trading and clearing of the exchange traded currency options contracts and management of risks. iii) AD Category - I banks, which do not meet the above minimum prudential requirements and AD Category - I banks, which are Urban Co-operative banks or State Co-operative banks, can participate in the exchange traded currency options market only as clients, subject to approval therefor from the respective regulatory Departments of the Reserve Bank. Position limits i) The position limits for various classes of participants for the currency options shall be subject to the guidelines issued by the SEBI. ii) The AD Category - I banks shall operate within prudential limits, such as Net Open Position (NOP) and Aggregate Gap (AG) limits. The option position of the banks, on their own account, in the exchange traded currency options shall form part of their NOP and AG limits. Risk Management measures The trading of exchange traded currency options shall be subject to maintaining initial, extreme loss and calendar spread margins and the Clearing Corporations / Clearing Houses of the exchanges should ensure maintenance of such margins by the participants on the basis of the guidelines issued by the SEBI from time to time. Surveillance and disclosures The surveillance and disclosures of transactions, in the exchange traded currency options market, shall be carried out in accordance with the guidelines issued by the SEBI. Authorisation to the Exchanges / the Clearing Corporations for dealing in Currency Options Recognized stock exchanges and their respective Clearing Corporations / Clearing Houses shall not deal in or otherwise undertake the business relating to the exchange traded currency options unless they hold an authorisation issued by the Reserve Bank under section 10 (1) of the Foreign Exchange Management Act, 1999. 6. Commodity Hedging Residents in India, engaged in import and export trade or as otherwise approved by the Reserve Bank from time to time, are permitted to hedge the price risk of permitted commodities in the international commodity exchanges/ markets. This facility must not be used in conjunction with any other derivative product. It may be noted that the role of Authorized Dealer banks here is primarily to provide facilities for remitting foreign currency amounts towards margin requirements from time to time, subject to verification of the underlying exposure. In lieu of making a direct remittance towards payment obligations arising out of commodity derivative transactions entered into by customers with overseas counterparties, AD Category I banks may issue guarantees/standby letters of credit to cover these specific payment obligations related to commodity derivatives, subject to the conditions/guidelines in Annex XV. It is clarified that the term Board, wherever used refers to Board of Directors or the equivalent forum in case of partnership or proprietary firms. The facility is divided into following categories: I) Delegated Route a. Hedging of price risk on actual Import/Export of commodities Participants Users: Companies in India listed on a recognized stock exchange engaged in import and export of commodities Facilitators: AD Category I banks specifically authorized by the Reserve Bank in this regard. Purpose: To hedge price risk of the imported/exported commodity Products: Standard exchange traded futures and options (purchases only) in international commodity exchanges. If risk profile warrants –may use OTC contracts overseas. Operational Guidelines AD Category I banks satisfying certain minimum norms, and authorized by the Reserve Bank may grant permission to companies listed on a recognized stock exchange to hedge price risk on import/ export in respect of any commodity(except gold, silver, platinum) in the international commodity exchanges/ markets. The guidelines are given in Annex XI (A & B). b. Hedging of anticipated imports of crude oil Participants Users: Domestic companies engaged in refining crude oil. Facilitators : AD Category I banks specifically authorized by the Reserve Bank in this regard. Purpose: To hedge the price risk on crude oil imports on the basis of past performance. Products: Standard exchange traded futures and options (purchases only) in international commodity exchanges. If risk profile warrants – may use OTC contracts overseas. Operational Guidelines : a) Hedging to be permitted up to 50 per cent of the volume of actual imports during the previous year or 50 per cent of the average volume of imports during the previous three financial years, whichever is higher. b) Contracts booked under this facility will have to be regularized by production of supporting import orders during the currency of the hedge. An undertaking may be obtained from the companies to this effect. c) All other conditions and guidelines as per Annex XI should be complied with. c. Hedging of price risk on domestic purchase and sales (i) Select Metals Participants Users : Domestic producers/ users of aluminium, copper, lead, nickel and zinc listed on a recognized stock exchange. Facilitators: AD Category I banks specifically authorized by the Reserve Bank in this regard Purpose: To hedge the price risk on aluminium, copper, lead, nickel and zinc based on their underlying economic exposures Products: Standard exchange traded futures and options (purchases only) in international commodity 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 year’s actual purchases / sales turnover, whichever is higher, 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 overall framework within which derivatives activities should be conducted and the risks controlled. c) All other conditions and guidelines as per Annex XI (A & B) should be complied with. (ii) ATF (Aviation Turbine Fuel) Participants Users: Actual domestic users of ATF. Facilitators: AD Category I banks specifically authorized by the Reserve Bank in this regard. Purpose: To hedge economic exposures in respect of ATF based on domestic purchases. Products: Standard exchange traded futures and options (purchases only) in international commodity exchanges. If risk profile warrants – may use OTC contracts overseas. Operational Guidelines: a) AD Category I banks should ensure that permission for hedging ATF is granted only against firm orders. b) AD Category I banks should retain necessary documentary evidence. c) AD Category I banks would require the user to submit a Board resolution certifying Board approved policies which define the overall framework within which derivatives activities should be conducted and the risks controlled. d) All other conditions and guidelines as per Annex XI (A & B) should be complied with. (iii) Domestic purchases of crude oil and sales of petro-products Participants Users: Domestic crude oil refining companies. Purpose: To hedge commodity price risk on domestic purchases of crude oil and domestic sales of petroleum products, which are linked to international prices. Products: Standard exchange traded futures and options (purchases only) in international commodity exchanges. If risk profile warrants – may use OTC contracts overseas. Operational Guidelines : a) The hedging will be allowed strictly on the basis of underlying contracts. b) AD Category I banks should retain necessary documentary evidence. c) All other conditions and guidelines as per Annex XI (A & B) should be complied with. d. Hedging of price risk on Inventory Participants Users: Domestic oil marketing and refining companies. Facilitators: AD Category I banks specifically authorized by the Reserve Bank in this regard. Purpose: To hedge commodity price risk on Inventory. Products: Over-the-counter (OTC) / exchange traded derivatives overseas with tenor restricted 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 the quarter proceeding the previous quarter. b) All other conditions and guidelines as per Annex XI (A & B) should be complied with. II) Approval Route Participants Users: Residents in India, other than companies listed on recognized stock exchanges, engaged in import and export of commodities or customers who are exposed to systemic international price risk. Facilitators: AD Category I banks Purpose: To hedge price risk of the imported/exported commodity and systemic international price risk Products: Standard exchange traded futures and options (purchases only) in international commodity exchanges. If risk profile warrants – may use OTC contracts overseas. Operational Guidelines: Applications of companies/ firms which are not covered by the delegated authority of AD Category I may be forwarded to the Reserve Bank for consideration through the International Banking Division of an AD Category I bank concerned along with the latter’s specific recommendations. The details of the application are given in Annex XII. III) Entities in Special Economic Zones (SEZ) Participants Users: Entities in Special Economic Zones (SEZ) Facilitators: AD Category I banks Purpose: To hedge price risk of the imported/exported commodity Products: Standard exchange traded futures and options (purchases only) in international commodity exchanges. If risk profile warrants – may use OTC contracts overseas. Operational Guidelines: AD banks may allow entities in the Special Economic Zones (SEZ) to undertake hedging transactions in the overseas commodity exchanges/markets to hedge their commodity prices on export/import, subject to the condition that such contract is entered into on a stand-alone basis. (The term ''standalone'' means the unit in SEZ is completely isolated from financial contacts with its parent or subsidiary in the mainland or within the SEZs as far as its import/export transactions are concerned.) NOTE: The detailed guidelines in respect of Delegated Route and Approval Route are given in the Annex XI and XII respectively. 7. Freight hedging Domestic oil refining companies and shipping companies exposed to freight risk, are permitted to hedge their freight risk by the AD Category I banks authorized by the Reserve Bank. Other companies exposed to freight risk can seek prior permission from the Reserve Bank through their AD Category I bank. It may be noted that the role of Authorized Dealer banks here is primarily to provide facilities for remitting foreign currency amounts towards margin requirements from time to time, subject to verification of the underlying exposure. This facility must not be used in conjunction with any other derivative product. The facility is divided into following categories: I) Delegated Route Participant: Users: Domestic oil-refining companies and shipping companies. Facilitators: AD Category I banks, specifically authorized by the Reserve Bank i.e. those who have been delegated the authority to grant permission to listed companies to hedge commodity price risk in the international commodity exchanges / markets, subject to the conditions 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:
(a) For Domestic oil refining companies:
(b) For shipping companies:
II) Approval Route Participants Users: Companies (other than domestic oil-refining companies and shipping companies) who are exposed to freight risk Facilitators: AD Category I banks Purpose: To hedge freight risk Products: Plain vanilla Over the Counter (OTC) or exchange traded products in the international market / exchange. Operational Guidelines
SECTION II For 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. Participants Market-makers – In respect of FIIs, designated branches of AD Category I banks maintaining accounts of FIIs. In all other cases, AD Category 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 Institutional Investors (FIIs) Purpose i) To hedge currency risk on the market value of entire investment in equity and/or debt in India as on a particular date. Products Forward foreign exchange contracts with rupee as one of the currencies and foreign currency-INR options. Foreign Currency – INR swaps for IPO related flows. Operational Guidelines, Terms and Conditions
2. Facilities for Non-resident Indians (NRIs) Purpose
Products
3. Facilities for Hedging Foreign Direct Investment in India Purpose
Products Forward foreign exchange contracts with rupee as one of the currencies and foreign currency-INR options. Operational Guidelines, Terms and Conditions
SECTION III 1. Management of Banks’ Assets-Liabilities Users – AD Category I banks Purpose - Hedging of interest rate and currency risks of foreign exchange asset-liability portfolio Products - Interest Rate Swap, Interest Rate Cap/Collar, Currency Swap, Forward Rate Agreement. AD banks may also purchase call or put options to hedge their cross currency proprietary trading positions. Operational Guidelines, Terms and Conditions The use of these instruments is subject to the following conditions:
2. Hedging of Gold Prices Users –
Purpose – To hedge price risk of gold Products - Exchange-traded and over-the-counter hedging products available overseas. Operational Guidelines, Terms and Conditions
3. Hedging of Capital Users – Foreign banks operating in India Product – Forward foreign exchange contracts Operational Guidelines, Terms and Conditions a. Tier I capital -
b. Tier II capital -
4. Participation in the currency futures market in India Please refer to Part-A Section I, paragraph 4. In continuation of the same:
The AD Category - I banks which fulfill the prudential requirements should lay down detailed guidelines with the approval of their Boards for trading and clearing of currency futures contracts and management of risks. (c). AD Category - I banks which do not meet the above minimum prudential requirements and AD Category - I banks which are Urban Co-operative banks or State Co-operative banks can participate in the currency futures market only as clients, subject to approval and directions from the respective regulatory Departments of the Reserve Bank. (d) The AD Category - I banks, shall operate within prudential limits, such as Net Open Position (NOP) and Aggregate Gap (AG) limits. The exposure of the banks, on their own account, in the currency futures market shall form part of their NOP and AG limits. 5. Participation in the exchange traded currency options market in India Please 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 exchange traded currency options market of the recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:
The AD Category - I banks, which fulfil the prudential requirements, should lay down detailed guidelines with the approval of their Boards for trading and clearing of the exchange traded currency options contracts and management of risks. b) AD Category - I banks, which do not meet the above minimum prudential requirements and AD Category - I banks, which are Urban Co-operative banks or State Co-operative banks, can participate in the exchange traded currency options market only as clients, subject to approval therefor from the respective regulatory Departments of the Reserve Bank. c) The AD Category - I banks shall operate within prudential limits, such as Net Open Position (NOP) and Aggregate Gap (AG) limits. The option position of the banks, on their own account, in the exchange traded currency options shall form part of their NOP and AG limits. PART B 1. General (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. 2. Rupee Accounts of Non-Resident Banks AD Category I banks may open/close Rupee accounts (non-interest bearing) in the names of their overseas branches or correspondents without prior reference to the Reserve Bank. Opening of Rupee accounts in the names of branches of Pakistani banks operating outside Pakistan requires specific approval of the Reserve Bank. 3. Funding of Accounts of Non-resident Banks (i) AD Category 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 bonafide 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: Forward purchase or sale of foreign currencies against Rupees for funding is prohibited. Offer of two-way quotes in Rupees to non-resident banks is also prohibited. 4. Transfers from other Accounts Transfer of funds between the accounts of the same bank or different banks is freely permitted. 5. Conversion of Rupees into Foreign Currencies Balances held in Rupee accounts of non-resident banks may be freely converted into foreign currency. All such transactions should be recorded in Form A2 and the corresponding debit to the account should be in form A3 under the relevant Returns. 6. Responsibilities of Paying and Receiving Banks In the case of credit to accounts the paying banker should ensure that all regulatory requirements are met and are correctly furnished in form A1/A2 as the case may be. 7. Refund of Rupee Remittances 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. 8. Overdrafts / Loans to Overseas Branches/ Correspondents (i) AD Category I banks may permit their overseas branches/ correspondents temporary overdrawals not exceeding Rs.500 lakhs in aggregate, for meeting normal business requirements. This limit applies to the amount outstanding against all overseas branches and correspondents in the books of all the branches of the authorised AD Category I 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 Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Amar Building, 5th Floor, Mumbai 400001 within 15 days from the close of the month, stating the reasons thereof. Such a report is not necessary if arrangements exist for value dating. (ii) AD Category I bank 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, Foreign Exchange Department, Forex Markets Division, Central Office, Amar Building, 5th Floor, Mumbai, 400001. 9. Rupee Accounts of Exchange Houses Opening of Rupee accounts in the names of Exchange Houses for facilitating private remittances into India requires approval of the Reserve Bank. Remittances through Exchange Houses for financing trade transactions are permitted upto Rs.2,00,000 per transaction. PART C 1. General The Board of Directors of AD Category I banks should frame an appropriate policy and fix suitable limits for various Treasury functions. 2. Position and Gaps The net overnight open exchange position (Annex-I) and the aggregate gap limits are required to be approved by the Reserve Bank. 3. Inter-bank Transactions Subject to compliance with the provisions of paragraphs 1 and 2, AD Category I banks may freely undertake foreign exchange transactions as under: a) With AD Category I banks in India: (i) Buying/Selling/Swapping foreign currency against Rupees or another foreign currency. b). With banks overseas and Off-shore Banking Units in Special Economic Zones (i) Buying/Selling/Swapping foreign currency against another foreign currency to cover client transactions or for adjustment of own position, NOTE : A. Funding of accounts of Non-resident banks - please refer to paragraph 3 of Part B. 4. Foreign Currency Accounts/ Investments in Overseas Markets (i) Inflows into foreign currency accounts arise primarily from client-related transactions, swap deals, deposits, borrowings, etc. AD Category I banks may maintain balances in foreign currencies up to the levels approved by the Board. 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 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 made 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 at least as AA (-) by Standard & Poor / FITCH IBCA or Aa3 by Moody's. For the purpose of investments in debt instruments other than the money market instruments of any foreign state, bank's Board may lay down country ratings and country - wise limits separately wherever necessary. NOTE: For the purpose of this clause, 'money market instrument' would include any debt instrument whose life to maturity does not exceed one year as on the date of purchase. (iii) AD Category I banks may also invest the un-deployed FCNR (B) funds in overseas markets in long-term fixed income securities subject to the condition that the maturity of the securities invested in do not exceed the maturity of the underlying FCNR (B) deposits. (iv) Foreign currency funds representing surpluses in the nostro accounts 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. 5. Loans/Overdrafts a) All categories of overseas foreign currency borrowings of AD Category I banks, (except for borrowings at (c) below), including existing External Commercial Borrowings and loans/overdrafts from their Head Office, overseas branches and correspondents and overdrafts in nostro accounts (not adjusted within five days), shall not exceed 50 per cent of their unimpaired Tier I capital or USD 10 million (or its equivalent), whichever is higher. The aforesaid limit applies to the aggregate amount availed of by all the offices and branches in India from all their branches/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 not adjusted within five days, a report, as per the format in Annex-VIII, should be submitted to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, 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. b) The funds so raised may be used for purposes other than lending in foreign currency to constituents in India and repaid without reference to the Reserve Bank. As an exception to this rule, AD Category I banks are permitted to use borrowed funds as also foreign currency funds received through swaps for granting foreign currency loans for export credit in terms of IECD Circular No 12/04.02.02/2002-03 dated January 31,2003. Any fresh borrowing above this limit shall be made only with the prior approval 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 unimpaired Tier I capital or USD 10 million (or its equivalent), whichever is higher: i). Overseas borrowings by AD Category I banks for the purpose of financing export credit subject to the conditions prescribed in IECD Master Circular dated July 1, 2003 on Export Credit in foreign currency. ii). Subordinated debt placed by head offices of foreign banks with their branches in India as Tier II capital. iii) Capital funds raised/augmented by the issue of Innovative Perpetual Debt Instruments and Debt 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.23/21.01.002/2006-07 dated July 21, 2006 iv) any other overseas borrowing with the specific approval of the Reserve Bank. d) Interest on loans/overdrafts may be remitted (net of taxes) without the prior approval of Reserve Bank. PART D i) The Head/Principal Office of each AD Category-I banks should submit daily statements of Foreign Exchange Turnover in Form FTD and Gaps, Position and Cash Balances in Form GPB through the Online Returns Filing System (ORFS) as per format given in Annex-II. ii) The Head/Principal Office of each authorised dealer category-I should forward a statement of Nostro / Vostro Account balances on a monthly basis in the format given in Annex-III to the Director, Division of International Finance, Department of Economic Analysis and Policy, Reserve Bank of India, Central Office Building, 8th Floor, Fort, Mumbai-400 001. The data may also be transmitted by fax or e-mail at the numbers/addresses given in the format. iii) AD Category-I banks should consolidate the data on cross currency derivative transactions undertaken by residents and submit half-yearly reports (June and December) to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Amar Building, 5th Floor, Mumbai-400 001 as per the format indicated in the Annex-IV. iv) AD Category-I banks should forward details of exposures in foreign exchange as at the end of every quarter as per the format indicated in Annex-V to the Chief General Manger, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Amar Building, 5th Floor, Mumbai, 400 001. Please note that details of exposures of all corporate clients who meet the prescribed criteria have to be included in the report. The AD banks should submit this report based on bank's books and not based on corporate returns. v) Authorised Dealers Category I should forward details of option transactions (FCY-INR) undertaken on a weekly basis as per the format indicated in Annex VIII. vi) AD Category-I banks have to report their total outstanding foreign currency borrowings under all categories as on the last Friday of every month to The Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Amar Building, 5th Floor, Mumbai-400 001, as per the format in Annex-IX. The report should be received by the 10th of the following month. vii) AD Category-I banks are required to submit a monthly report (as on the last Friday of every month) on the limits granted and utilized by their constituents under the facility of booking forward contracts on past performance basis, as per the format in Annex-X. The report may be forwarded to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Amar Building, 5th Floor, Mumbai-400 001 and by e-mail so as to reach the Department by the 10th of the following month. viii) The Head/Principal Office of each AD Category-I banks should submit a statement in form BAL giving details of their holdings of all foreign currencies on fortnightly basis through Online Returns Filing System (ORFS) within seven calendar days from the close of the reporting period to which it relates. ix) A monthly statement should be furnished to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Amar Building, 5th Floor Mumbai-400 001, before the 10th of the succeeding month, in respect of cover taken by FIIs, indicating the name of the FII / fund, the eligible amount of cover, the actual cover taken, etc. as per the format in Annex XIII. x) The Head/Principal Office of each AD Category-I banks should furnish an up-to-date list (in triplicate) of all its offices/branches, which are maintaining Rupee accounts 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 the Reserve Bank, Foreign Exchange Department, Trade Division, Amar Building 5th Floor, Mumbai 400 001. The offices/branches should be classified according to area of jurisdiction of Reserve Bank Offices within which they are situated. xi) AD Category – I banks are required to submit a quarterly report on the forward contracts booked & cancelled by SMEs and Resident Individuals, to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Central Office, Forex Markets Division, Amar Building, 5th Floor, Mumbai - 400 001 within the first week of the following month, as per format given in Annex XIV. List of Circulars/Notifications which have been consolidated in the Master Circular on Risk Management and Inter-Bank Dealings
This circular should be read in conjunction with FEMA, 1999 and the Rules/ Regulations / Directions / Orders/ Notifications issued thereunder. 1 A European option may be exercised only at the expiry date of the option, i.e. at a single pre-defined point in time. 2 SME as defined by the Rural Planning and Credit Department, Reserve Bank of India vide circular RPCD.PLNS. BC.No.63/06.02.31/2006-07 dated April 4, 2007. |