RBI tightens forex derivative rules: What changes for hedging, cancelled trades
Under the new measures, authorised dealers will not be permitted to allow users to rebook any foreign exchange derivative contract involving the rupee, whether deliverable or non-deliverable, if it was cancelled with any authorised dealer after the issuance of the Directions. Rollovers of derivative contracts at maturity will continue to be permitted, subject to existing regulatory requirements.
“Authorised Dealers shall not permit users to rebook any foreign exchange derivative contract involving INR, whether deliverable or non-deliverable, which has been cancelled with any Authorised Dealer after the issuance of the Directions,” said RBI in a circular.
The RBI has also sharply reduced the threshold for undertaking foreign exchange derivative transactions to hedge contracted exposures without establishing the existence of the underlying exposure. The limit has been cut to $5 million equivalent from $100 million across all authorised dealers.
“The existing threshold of $100 million equivalent for undertaking foreign exchange derivative transactions to hedge contracted exposures without establishing the existence of the underlying exposure has been reduced to $5 million equivalent, across all Authorised Dealers.
A corresponding reduction has been introduced for exchange-traded currency derivatives involving the rupee. The threshold for taking positions without establishing underlying exposure has been lowered to $5 million equivalent from $100 million, across all recognised stock exchanges taken together.
ALSO READ: US bull market nears fourth anniversary, but narrow rally raises risksIn a further step to strengthen verification of hedging activity, authorised dealers will be required to obtain and retain an undertaking from users entering into rupee-linked foreign exchange derivative contracts to hedge contracted exposures. The undertaking must confirm that the same underlying exposure has not been hedged with another authorised dealer.
The central bank has also introduced a Foreign Exchange Risk Reserve (FERR) requirement for rupee-linked foreign exchange derivative contracts with a notional value exceeding $2 million equivalent. Authorised dealers will be required to maintain a cash reserve with the RBI equal to 20% of the rupee equivalent of the notional amount of each covered transaction.
“In respect of all foreign exchange derivative contracts involving INR that are for notional value exceeding USD two million equivalent, Authorised Dealers shall be required to maintain with the Reserve Bank an FERR in cash, equal to 20 per cent of the INR equivalent of the notional amount of each transaction. This FERR shall be applicable for foreign exchange derivative contracts involving INR undertaken to hedge current account exposures where the user purchases foreign currency against the INR.”
The FERR requirement will apply to contracts undertaken to hedge current account exposures where the user purchases foreign currency against the rupee.
The RBI said the measures are intended to strengthen market discipline, ensure appropriate risk management and maintain orderly and transparent functioning of the foreign exchange market.
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