Exchange Traded Currency Options (Reserve Bank) Directions, 2010 - FED.01-ED(HRK)-2010 - Foreign Exchange Management

NOTIFICATION New Delhi, the 30th July, 2010 FED.01-ED(HRK)-2010 - The Reserve Bank of India having considered necessary in public interest and having regard to the need for regulating the financial system of the country to its advantage, in exercise of its powers conferred by section 45W of the Reserve Bank of India Act, 1934 and of all the powers enabling it in this behalf, hereby gives the following directions to all the persons dealing in currency options on recognised stock exchanges. 1. Short title and commencement of the directions:- These directions may be called the Exchange Traded Currency Options (Reserve Bank) Directions, 2010 and they shall come into force with effect from July 30, 2010. 2. Applicability:- These directions shall apply to currency options traded on a stock exchange recognised under Section 4 of the Securities Contract (Regulation) Act, 1956. 3. Permission:- (i) Currency option contracts are permitted in US Dollar - Indian Rupee spot rate, or any other currency pairs, as may be approved by the Reserve Bank from time to time. (ii) Only 'persons resident in India', as defined in section 2(v) of the Foreign Exchange Management Act, 1999 (Act 42 of 1999) are permitted to buy or sell exchange traded currency options to hedge an exposure to foreign exchange rate risk or otherwise. 4. Features of currency option contracts Standardized exchange traded currency options shall have the following features: a) The underlying for the currency option shall be US Dollar - Indian Rupee (USD-INR) spot rate. b) The options shall be premium styled European call and put options. c) The size of each contract shall be USD 1000. d) The premium shall be quoted in Rupee terms. The outstanding position shall be in USD. e) The maturity of the contracts shall not exceed twelve months. f) The contracts shall be settled in cash in Indian Rupees. g) The settlement price shall be the Reserve Bank's Reference Rate on the date of expiry of the contracts. 5. Participants:- i) No person other than 'a person resident in India', as defined in section 2(v) of the Foreign Exchange Management Act, 1999 (Act 42 of 1999) shall participate in the exchange traded currency options market. ii) Notwithstanding sub-paragraph (i), no scheduled bank or such other agency falling under the regulatory purview of the Reserve Bank under the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949 or any other Act or instrument having the force of law shall participate in the exchange traded currency options market without the permission from the respective regulatory Departments of the Reserve Bank. iii) Entities falling under the regulatory purview of any other regulators established by law shall participate in the exchange traded currency options market only with the prior permission of their regulators concerned and participation of such entities as members or clients shall be in accordance with the guidelines issued by the regulator concerned. 6. 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: a) Minimum net worth of ₹ 500 crores. b) Minimum CRAR of 10 per cent. c) Net NPA should not exceed 3 per cent. d) Made net profit for last 3 years. 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. 7. 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. 8. 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. 9. 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. 10. 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 . 11. Powers of Reserve Bank:- The Reserve Bank may from time to time modify the eligibility criteria for the participants and 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 the foreign exchange market in India. H.R. Khan Executive Director