RBI issues Guidelines for OTC Forex Derivatives and Overseas Hedging of Commodity Price and Freight Risks; Guidelines to be effective February 1, 2011

The Reserve Bank of India has today issued Guidelines on Over the counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of Commodity Price and Freight Risks (www.rbi.org.in/scripts/NotificationUser.aspx?Id=6175&Mode=0) . These guidelines will be effective from February 01, 2011. The important aspects of the revised guidelines are:

• Providing lead time for submission of original documents.
• Submission of quarterly statutory auditor certificates in respect of bookings made both, under the contracted exposure and past performance routes.
• Allowing embedded cross currency option in case of foreign currency-Rupee swaps.
• Permitting the use of cost reduction structures, both, under the contracted exposures and past performance routes, subject to certain safeguards like minimum net worth, compliance with AS 30/32, risk management capabilities of the corporate, turnover, tenor, etc.

Background

It may be recalled that the existing guidelines on OTC foreign exchange derivatives were reviewed in the context of developments in the international and domestic markets and the draft guidelines were placed on the Reserve Bank’s website on November 12, 2009 for feedback from the market participants. The draft guidelines, inter alia, proposed to withdraw the facility of cost reduction structures and permit the clients/ customers to write covered call and put options and thereby receive premium in both foreign currency-Rupee options as well as cross currency options. Some of the stakeholders, particularly the Indian multinational corporations (MNCs) having global operations had represented that prohibitions on the use of cost reduction structures would impede their forex risk management operations and their global competitiveness.

The feedback and suggestions received from the stakeholders were examined and discussed in detail at the meetings of the Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets, the Fixed Income Money Market Derivatives Association of India and the Foreign Exchange Dealers’ Association of India. Considering the suggestions made by the market participants and other stakeholders, it was proposed to allow the use of cost reduction structures, subject to certain safeguards including suitability and appropriateness of the products.

The revised draft guidelines consisting of the proposed changes and modifications were again placed on the Reserve Bank’s website on July 23, 2010 for another round of feedback from the various stakeholders. Several valuable suggestions from industry associations, banks, corporate, academics were received on the revised draft guidelines. The feedback was analysed and discussed with the stakeholders and based on the suggestions, the guidelines have now been finalised.

Alpana Killawala
Chief General Manager

Press Release : 2010-2011/908