TaxTMI 
TaxTMI 
Risk Management and Inter-Bank Dealings – Hedging of foreign exchange risk
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....so, the Directions in respect of all types of foreign exchange transactions (including cash, tom and spot) have been consolidated. Further, the Directions contained in the Currency Futures (Reserve Bank) Directions, 2008 (Notification No. FED.1/DG(SG)-2008 dated August 06, 2008), as amended from time to time, and Exchange Traded Currency Options (Reserve Bank) Directions, 2010 (Notification No. FED.01/ED(HRK)-2010 dated July 30, 2010), as amended from time to time, are now being incorporated in the Master Direction - Risk Management and Inter-Bank Dealings. 3. The revised Directions are provided at Annex-I to this circular. These Directions shall come into effect from April 05, 2024, replacing the existing Directions in Part A (Section I) of the Master Direction - Risk Management and Interbank Dealings dated July 5, 2016, as amended from time to time, and in supersession of the notifications listed in the Annex-II. 4. Authorised Persons shall mean Authorised Dealer Category - I banks and for the purpose of exchange traded currency derivatives, Recognised Stock Exchanges and Recognised Clearing Corporations, authorised under Section 10 (1) of the Foreign Exchange Management Act, 1....
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....n the Regulation 2(xvi) of the Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000 (Notification no. FEMA.25/2000-RB dated May 03, 2000), as amended from time to time. (g) 'Foreign currency interest rate derivative contract' means a financial contract which derives its value from the change in the interest rate of a foreign currency and which is for settlement at a future date, i.e. any date later than the spot settlement date, provided that contracts involving currencies of Nepal and Bhutan shall not qualify under this definition. (h) 'Foreign exchange derivative contract' means a financial contract which derives its value from the change in the exchange rate of two currencies at least one of which is not Indian Rupee and which is for settlement at a future date, i.e. any date later than the spot settlement date, provided that contracts involving currencies of Nepal and Bhutan shall not qualify under this definition. (i) 'Hedging' means the activity of undertaking a foreign exchange derivative / foreign currency interest rate derivative transaction to offset the impact of an anticipated or a contracted exposure. (j) 'Leveraged derivative' ....
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....reign Exchange Management Act, 1999, Reserve Bank of India Act, 1934, and Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000, as amended from time to time. 2. Directions for OTC foreign exchange transactions 2.1 User Classification Framework (i) Authorised Dealers shall classify users as retail or non-retail for the purpose of offering foreign exchange derivative contracts and foreign currency interest rate derivative contracts. (ii) The following users shall be eligible to be classified as non-retail users: (a) All India Financial Institutions (AIFIs) and Non-Banking Finance Companies (NBFCs) (including Standalone Primary Dealers (SPDs) and Housing Finance Companies (HFCs)); (b) Insurance Companies regulated by the Insurance Regulatory and Development Authority of India (IRDAI); (c) Pension Funds regulated by the Pension Fund Regulatory and Development Authority (PFRDA); (d) Mutual Funds and Alternative Investment Funds regulated by the Securities and Exchange Board of India (SEBI); (e) Resident users with (a) minimum net worth of ₹500 crore; or (b) minimum turnover of ₹1000 crore, as per the latest audited financial sta....
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....er the following foreign currency interest rate derivative contracts to retail users: (a) forward rate agreement; (b) interest rate swap; (c) purchase of interest rate call option (European); (d) purchase of interest rate put option (European); (e) purchase of interest rate cap; (f) purchase of interest rate floor; (g) purchase of interest rate collar; and (h) purchase of interest rate reverse collar. (v) Authorised Dealers may offer the following foreign currency interest rate derivative contracts to non-retail users: (a) all foreign currency interest rate products permitted to be offered to the retail users; (b) option to undertake / cancel a forward rate agreement / interest rate swap / interest rate option; and (c) any other foreign currency interest rate derivative contract including derivatives having cash instrument(s) and/or permitted derivative(s) as components, but excluding leveraged derivatives and derivatives containing a derivative instrument as underlying other than those specifically permitted. (vi) NDDCs involving INR can be offered to residents and non-residents by an Authorised Dealer Category-I bank, provided the Authorised Dealer Categor....
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.... exist, in full or in part, the user has appropriately adjusted the hedge to ensure adherence to (b) above, unless the original derivative contract is assigned against any other unhedged exposure. No adjustment to the hedge is required to be made if, in the considered opinion of the Authorised Dealer, the change in exposure is not material; (d) In cases where the value of the exposure falls below the notional of the derivative, the notional should be suitably adjusted unless such divergence has occurred on account of changes in the market value of the exposure, in which case the user may, at his discretion, continue with the derivative contract till its original maturity. No adjustment to the hedge is required to be made if, in the considered opinion of the Authorised Dealer, the change in exposure is not material; (e) Where the value of the exposure is not ascertainable with certainty, derivative contracts may be booked on the basis of reasonable estimates. Such estimates should be reviewed periodically to ensure compliance with (c) and (d) above. Provided that Authorised Dealers shall permit users to take position up to USD 100 million equivalent of notional value (outstandi....
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....sidiary / joint venture of Authorised Dealers incorporated in India can undertake such transactions provided the wholly owned subsidiary / joint venture is a banking entity; (c) In case of a central treasury / group entity of the non-resident user, the Authorised Dealer shall ensure that the central treasury / group entity is appropriately authorised by the user to deal for and on its behalf; and (d) Authorised Dealers shall provide information, data or any other particular required by the Reserve Bank of India in respect of the aforesaid transactions in the manner and time prescribed. (vii) Authorised Dealer shall ensure that in the case of non-resident users, all payables incidental to the foreign exchange transactions are met by the user out of repatriable funds and / or inward remittance through normal banking channels. (viii) Market-makers in OTC markets shall comply with the Master Direction - Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021 issued vide RBI Circular No. FMRD.FMD.07/02.03.247/2021-22 dated September 16, 2021, as amended from time to time. (ix) Existing contracts booked under the provisions of the earlier Directions may be contin....
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.... INR, across all the Recognized Stock Exchanges put together, are backed by contracted exposure; (ii) The same exposure has not been hedged using any another derivative contract; (iii) The notional amount and tenor of the derivative contract does not exceed the value and tenor of the exposure; (iv) In case the exposure ceases to exist, in full or in part, the user has appropriately adjusted the hedge to ensure adherence to (iii) above, unless the original derivative contract is assigned against any other unhedged exposure. No adjustment to the hedge is required to be made if, in the considered opinion of the Authorised Dealer, the change in exposure is not material; (v) In cases where the value of the exposure falls below the notional of the derivative, the notional should be suitably adjusted unless such divergence has occurred on account of changes in the market value of the exposure, in which case the user may, at his discretion, continue with the derivative contract till its original maturity. No adjustment to the hedge is required to be made if, in the considered opinion of the Authorised Dealer, the change in exposure is not material; (vi) Where the value of the exp....
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....999 shall submit to the Reserve Bank of India such returns, documents and other information as may be required, in the format and time frame specified, if any. Also, they shall report any major development relating to its functioning of the permitted products such as market abuse, market disruption, adverse finding relating its functioning or regulatory action, etc., at the earliest to the Chief General Manager, Financial Markets Regulation Department, Reserve Bank of India (via email to [email protected]). (viii) The Reserve Bank may from time to time modify the eligibility criteria for the participants, modify participant-wise position limits, prescribe margins and / or impose specific margins for identified participants, fix or modify any other prudential limits, or take such other actions as deemed necessary in public interest, in the interest of financial stability and orderly development and maintenance of foreign exchange market in India. Addendum Annex XII of Master Direction - Risk Management and Inter-bank Dealings - Foreign Exchange Derivative Contracts and Foreign Currency Interest Rate Derivative Contracts: Definitions In these Directions, unless the context other....
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....al amount only) on a specified date (the near leg) and a reverse exchange of the same two currencies at a date further in the future (the far leg), at rates agreed at the time of the contract. (k) 'Forward rate agreement' means a cash-settled OTC foreign currency interest rate derivative contract between two counterparties, in which a buyer will pay or receive, on the settlement date, the difference between a pre-determined fixed rate (FRA rate) and a reference interest rate, applied on a notional principal amount, for a specified forward period. (l) 'Interest rate call option (European)' means an OTC foreign currency interest rate derivative contract that gives the buyer the right, but not the obligation, to buy an interest rate instrument or receive an interest rate on a notional principal at a pre-determined price / rate on a specified date in the future. (m) 'Interest rate cap' means a series of interest rate call options (European) (called caplets) in which the buyer of the option receives a payment at the end of each period when the underlying interest rate is above a rate agreed in advance. (n) 'Interest rate collar' means an OTC foreign currency interest derivat....