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TMI BlogRisk Management and Inter-Bank DealingsX X X X Extracts X X X X X X X X Extracts X X X X ..... Manager PART - A RISK MANAGEMENT Section I Facilities for Residents other than authorised dealers: Forward Exchange Contracts A.1 (i) Authorised dealers may enter into forward contracts with residents in accordance with the provisions contained in paragraph 1 of Schedule I to Reserve Bank Notification No. FEMA25/RB-2000 dated 3 rd May 2000 and amendments thereto. (ii) While booking contracts for their constituents, authorised dealers should verify suitable documentary evidence, irrespective of the underlying transaction being a current account or a capital account transaction, to ensure that an exposure exists, to the extent of the amount of cover sought. Full particulars of contract should be marked on such documents under proper authentication and copies thereof retained for verification. A.2 Authorised dealers may also allow importers and exporters to book forward contracts on the basis of a declaration of an exposure and based on past performance subject to the conditions prescribed by Reserve Bank of India in this regard. {Ref: EC.CO.FMD/453/02.03.75/2001-02 dated December 1, 2001 and AP (DIR Series) Circular No.63 dated December 21,2002}. A.3 .A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written on a fully covered back-to-back basis. The cover transaction may be undertaken with a bank outside India, an off-shore banking unit situated in a Special Economic Zone or an internationally recognized option exchange or another authorised dealer in India. (iii) Authorised dealers desirous of writing options, should obtain one time approval, before undertaking the business, from the Chief General Manager, Exchange Control Department, (Forex Markets Division), Reserve Bank of India, Central Office, Mumbai, 400 001. Hedging of commodity price risk in the International Commodity Markets A.6 (i) Residents in India, engaged in import and export trade, may hedge the price risk of commodities in the international commodity exchanges/markets. Applications for commodity hedging may be forwarded to Reserve Bank through the International Banking Division of an authorised dealer giving the details laid down in Schedule III to the Reserve Bank Notification No. FEMA 25/RB-2000 dated 3rd May 2000. A one-time approval will be given by Reserve Bank along with the guidelines for undertaking this activity. (ii) General permission has been granted to entities in 'Special Economic Zon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Authorised Dealers Management of Bank's Assets-Liabilities: A.10 Authorised dealers may use the following instruments to hedge their assets-liability portfolio : Interest rate swaps, Currency swaps, and Forward rate agreements. Authorised dealers may also purchase call or put options to hedge their cross currency proprietary trading positions. The use of these instruments is subject to the following conditions: (a) An appropriate policy in this regard is approved by their Top Management. (b) The value and maturity of the hedge should not exceed that of the underlying (c) No 'stand alone' transactions can be initiated. If a hedge becomes naked in part or full owing to shrinking of the portfolio, it may be allowed to continue till the original maturity and should be marked to market at regular intervals. (d) The net cash flows arising out of these transactions are booked as income and expenditure and reckoned as exchange position wherever applicable. Hedging of Gold Prices A.11 (i) Banks authorised by Reserve Bank to operate the Gold Deposit Scheme may use exchange-traded and over-the-counter hedging products available overseas to manage the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se foreign currency from their overseas correspondents/branches at on-going market rates to lay down funds in their accounts for meeting their bona-fide 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 to non-resident banks is also prohibited. Transfers from other Accounts B.4 Transfer of funds between the accounts of the same bank or different banks is freely permitted. Conversion of Rupees into Foreign Currencies B.5 Balances held in rupee accounts of non-resident banks may be freely converted into foreign currency. All such transactions should be reported in Form A2 and the corresponding debit to the account should be in form A3 under the relevant R Returns. Responsibilities of Paying and Receiving Banks B.6 In the case of credit to accounts the paying banker should ensure that all Control requirements are met and are correctly furnished in form A1/A2 as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Special Economic Zones i. Buying/Selling/Swapping foreign currency against another foreign currency to cover client transactions or for adjustment of own position, ii. Initiating trading positions in the overseas markets . Note A: Funding of accounts of Non-resident banks - refer to paragraph B.4 B: Form A2 need not be completed for sales in the interbank market, but all such transactions shall be reported to Reserve Bank in R Returns Foreign currency accounts C.4 (i) Inflows into foreign currency accounts arise primarily from client-related transactions, swap deals, deposits, borrowings, etc. Banks may maintain balances in foreign currencies up to the levels approved by the Top Management. 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 Reserve Bank. (ii) Banks are free to undertake investments in overseas markets subject to the limits approved by their Board of Directors. Such investments may be made in overseas money market instruments and/or debt instruments issued by a foreign state with a residual maturity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t should be submitted to the Chief General Manager, Reserve Bank of India Exchange Control Department, Forex Markets Division, AmarBuilding, Fort, 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. (ii) Banks may avail of loans in excess of the limits prescribed in sub-paragraph (i) above solely for replenishing their rupee resources in India without prior approval of Reserve Bank. Such rupee funds may be used only for financing the banks' normal business operations and should not be deployed in the call money etc. markets. A report on each borrowing should be immediately forwarded to the Chief General Manager, Reserve Bank of India Exchange Control Department, Forex Markets Division, AmarBuilding, Fort, Mumbai 400001 whose prior permission will be required for repayment of such loans. Such permission will be given only if the bank has no borrowings outstanding either from Reserve Bank or other bank/financial institution in India and is clear of all money market borrowings for a period of at least four weeks before the repayment. (iii) Interest on loans/overdrafts may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts will cover only their branches in India. 2. Capital Capital refers to Tier I capital as per instructions issued by Reserve Bank of India (Department of Banking Operations and Development). 3. Calculation of the Net Open Position in a Single Currency The open position must first be measured separately for each foreign currency. The open position in a currency is the sum of (a) the net spot position, (b) the net forward position and (c) the net options position. a ) Net Spot Position The net spot position is the difference between foreign currency assets and the liabilities in the balance sheet. This should include all accrued income/expenses. b) Net Forward Position This represents the net of all amounts to be received less all amounts to be paid in the future as a result of foreign exchange transactions which have been concluded. These transactions, which are recorded as off-balance sheet items in the bank's books, would include: ( i ) spot transactions which are not yet settled; ( ii ) forward transactions; ( iii)guarantees and similar commitments denominated in foreign currencies which are certain to be called; ( iv )net of amounts to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs 4 months 5 months 6 months 6 months Annexure III [see paragraph C.6 (iii)] Statement of Nostro/Vostro Balances for the month of. Name address of the Authorised Dealer. Sr.no. Currency Net balance in Nostro Account Net balance in Vostro Account. 1 USD 2 EUR 3 JPY 4 GBP 5 Rupee 6 Other currencies (in US $ million) Note: In case the variation in each item above (given at 1 to 5) exceeds 10% in a month, the reason may be given briefly, as a footnote. The above statement should be addressed to: The Director Division of International Finance Department of Economic Analysis Policy Reserve Bank of India, CentralOfficeBuilding, 8 th Floor, Mumbai - 400 001. Phone: 022-2266 3791 Fax: 022-2262 2993, 2266 0792 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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