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TMI BlogMaster Circular on Risk Management and Inter-Bank Dealings (Updated as on March 31, 2015)X X X X Extracts X X X X X X X X Extracts X X X X ..... rincipal Chief General Manager INDEX PART - A RISK MANAGEMENT SECTION I Facilities for Persons Resident in India other than Authorised Dealers Category-I SECTION II Facilities for Persons Resident outside India SECTION III Facilities for Authorised Dealers Category-I PART-B ACCOUNTS OF NON-RESIDENT BANKS PART-C INTER-BANK FOREIGN EXCHANGE DEALINGS PART-D REPORTS TO THE RESERVE BANK Annex I Annex II Annex III Annex IV Annex V Annex VI Annex VII Annex VIII Annex IX Annex X Annex XI Annex XII Annex XIII Annex XIV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e customer within 15 days on more than three occasions in a financial year, booking of permissible derivative contracts in future may be allowed only against production of the underlying documents, at the time of booking the contract. The products available under this facility are as follows: i) Forward Foreign Exchange Contracts Participants Market-makers - AD Category I banks Users - Persons resident in India Purpose a) To hedge exchange rate risk in respect of transactions for which sale and /or purchase of foreign exchange is permitted under the FEMA 1999, or in terms of the rules/ regulations/directions/orders made or issued there under. b) To hedge exchange rate risk in respect of the market value of overseas direct investments (in equity and loan). Contracts covering overseas direct investment (ODI) can be cancelled or rolled over on due dates. If a hedge becomes naked in part or full owing to contraction ( due to price movement/impairment) of the market value of the ODI, the hedge may be allowed to continue until maturity, if the customer so desires. Rollovers on due date shall be permitted up to the extent of the market value as on that date. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y I bank can be rebooked with another AD Category I bank subject to the following conditions: the switch is warranted by competitive rates on offer, termination of banking relationship with the AD Category I bank with whom the contract was originally booked; the cancellation and rebooking are done simultaneously on the maturity date of the contract; and the responsibility of ensuring that the original contract has been cancelled rests with the AD Category I bank who undertakes rebooking of the contract. h) All non-INR forward contracts can be rebooked on cancellation subject to condition (i) below. i) The facility of rebooking should not be permitted unless the corporate has submitted the exposure information as prescribed in Annex V. j) Substitution of contracts for hedging trade transactions may be permitted by an AD Category I bank on being satisfied with the circumstances under which such substitution has become necessary. The AD Category I bank may also verify the amount and tenor of the underlying substituted. ii) Cross Currency Options (not involving Rupee) Participants Market-makers - AD Category I banks as approved for this purpose by the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject to conditions. AD Category I banks desirous of running a foreign currency-INR options book and fulfilling minimum eligibility criteria listed below, may apply to the Reserve Bank with copies of approval from the competent authority (Board/ Risk Committee/ ALCO), detailed memorandum in this regard, specific approval of the Board for the type of option writing and permissible limits. The memorandum put up to the Board should clearly mention the downside risks, among other matters. Minimum Eligibility Criteria: Net worth not less than ₹ 300 crore CRAR of 10 per cent Net NPAs not exceeding 3 per cent of the net advances Continuous profitability for at least three years The Reserve Bank will consider the application and accord a one-time approval at its discretion. AD Category I banks are expected to manage the option portfolio within the Reserve Bank approved risk management limits. f) AD banks may quote the option premium in Rupees or as a percentage of the Rupee/foreign currency notional. g) Option contracts may be settled on maturity either by delivery on spot basis or by net cash settlement in Rupees on spot basis as specified in the contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowing or to transform long-term INR borrowing into foreign currency liability. Operational Guidelines, Terms and Conditions No swap transactions involving upfront payment of Rupees or its equivalent in any form shall be undertaken. The term long-term exposure means exposures with residual maturity of one year or more. The swap transactions, once cancelled, can be rebooked or re-entered to hedge the underlying, only after the expiry of the tenor of the original swap contract that had been cancelled. AD Category I banks should not offer leveraged swap structures. Typically, in leveraged swap structures, a multiplicative factor other than unity is attached to the benchmark rate(s), which alters the payables or receivables vis- -vis the situation in the absence of such a factor. The notional principal amount of the swap should not exceed the outstanding amount of the underlying loan. The maturity of the swap should not exceed the remaining maturity of the underlying loan. v) Cost Reduction Structures i.e. cross currency option cost reduction structures and foreign currency -INR option cost reduction structures. Participants Market-makers - AD Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging of Borrowings in foreign exchange, which are in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000. Products - Interest rate swap, Cross currency swap, Coupon swap, Cross currency option, Interest rate cap or collar (purchases), Forward rate agreement (FRA) Participants Market-makers - AD Categ ory I banks in India Branch outside India of an Indian bank authorized to deal in foreign exchange in India Offshore banking unit in a SEZ in India. Users - Persons resident in India who have borrowed foreign exchange in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000. Purpose For hedging interest rate risk and currency risk on loan exposure and unwinding from such hedges. Operational Guidelines, Terms and Conditions The products, as detailed above should not involve the rupee under any circumstances. Final approval has been accorded or Loan Registration Number allotted by the Reserve Bank for borrowing in foreign currency. The notional principal amount of the product should not exceed the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, implying that in the event of cancellation, the exporter/importer shall have to bear the loss but will not be entitled to receive the gain. d) These limits shall be computed separately for import/export transactions. e) Higher limits will be permitted on a case-by-case basis on application to the Foreign Exchange Department, Central Office, Reserve Bank of India. The additional limits, if sanctioned, shall be on a deliverable basis. f) Any contract booked without producing documentary evidence will be marked off against this limit. These contracts once cancelled, are not eligible to be rebooked. Rollovers are also not permitted. g) AD banks should permit their clients to use the past performance facility only after satisfying themselves that the following conditions are complied with: i. An undertaking may be taken from the customer that supporting documentary evidence will be produced before the maturity of all the contracts booked. ii. Importers and exporters should furnish a quarterly declaration to the AD Category I banks, signed by the Chief Financial Officer (CFO) and the Company Secretary (CS), regarding amounts booked with other AD Category I banks und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and / or indirect exposures of SMEs to foreign exchange risk Product Forward foreign exchange contracts Operational Guidelines: Small and Medium Enterprises (SMEs) having direct and / or indirect exposures to foreign exchange risk are permitted to book / cancel / / roll over forward contracts without production of underlying documents to manage their exposures effectively, subject to the following conditions: Such contracts may be booked through AD Category I banks with whom the SMEs have credit facilities and the total forward contracts booked should be in alignment with the credit facilities availed by them for their foreign exchange requirements or their working capital requirements or capital expenditure. AD Category I bank should carry out due diligence regarding user appropriateness and suitability of the forward contracts to the SME customers as per Para 8.3 of 'Comprehensive Guidelines on Derivatives' issued vide DBOD.No.BP.BC.44/21.04.157/2011-12 dated November 2, 2011. The SMEs availing this facility should furnish a declaration to the AD Category I bank regarding the amounts of forward contracts already booked, if any, with other AD Cate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de an annual certificate to the AD Category I bank certifying that the derivative transactions are authorized and that the Board (or the equivalent forum in case of partnership or proprietary firms) is aware of the same. b) In the case of contracted exposure, AD Category I banks must obtain: i) An undertaking from the customer that the same underlying exposure has not been covered with any other AD Category I bank/s. Where hedging of the same exposure is undertaken in parts, with more than one AD Category I bank, the details of amounts already booked with other AD Category I bank/s should be clearly indicated in the declaration. This undertaking can also be obtained as a part of the deal confirmation. ii) An annual certificate from the statutory auditors to the effect that the contracts outstanding with all AD category I banks at any time during the year did not exceed the value of the underlying exposures at that time. It is reiterated, however, that that the AD bank, while entering into any derivative transaction with a client, shall have to obtain an undertaking from the client to the effect that the contracted exposure against which the derivative transaction is being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, 2008 and DBOD.No.BP.BC.94/08.12.001/2008-09 dated December 8, 2008. 4. Currency Futures on recognised Stock /New Exchanges As part of further developing the derivatives market in India and adding to the existing menu of foreign exchange hedging tools available to the residents and non-residents, currency futures contracts have been permitted to be traded in recognized stock exchanges or new exchanges, recognized by the Securities and Exchange Board of India (SEBI) in the country. The currency futures market would function subject to the directions, guidelines, instructions issued by the Reserve Bank and the SEBI, from time to time. Persons resident in India are permitted to participate in the currency futures market in India subject to directions contained in the Currency Futures (Reserve Bank) Directions, 2008 [Notification No.FED.1/DG(SG)-2008 dated August 6, 2008] (Directions) and Notification No.FED.2/ED (HRK)-2009 dated January 19, 2010 issued by the Reserve Bank of India, which have been issued under Section 45W of the Reserve Bank of India Act, 1934. Currency futures are subject to following conditions: Permission (i) Currency futures are permitted in US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all operate within prudential limits, such as Net Open Position (NOP) and Aggregate Gap (AG) limits. Risk Management measures The trading of currency futures 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. Surveillance and disclosures The surveillance and disclosures of transactions in the currency futures market shall be carried out in accordance with the guidelines issued by the SEBI. Authorisation to Currency Futures Exchanges / Clearing Corporations Recognized stock exchanges and their respective Clearing Corporations / Clearing Houses shall not deal in or otherwise undertake the business relating to currency futures unless they hold an authorization issued by the Reserve Bank under section 10(1) of the Foreign Exchange Management Act, 1999. 5. Currency Options on recognised Stock /New Exchanges In order to expand the existing menu of exchange traded hedging tools available to the residents and non residents, plain vanilla curre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. 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. 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. Surveillance and disclosures The surv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ETCD contracts shall be corresponding to the actual exports or imports contracted, as the case may be. Based on the above certificate, a trading member can book ETCD contracts upto fifty per cent of the eligible limit [as at paragraph (i) above] on behalf of the concerned customer. If a participant wishes to take position beyond the fifty per cent of the eligible limit in the ETCD, it has to produce a signed undertaking from the Chief Financial Officer (CFO) or the senior most functionary responsible for company's finance and accounts and the Company Secretary (CS) to the effect that the sum total of the outstanding OTC derivative contracts and outstanding ETCD contracts has been in correspondence with the eligible limits. In the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) shall co-sign the undertaking along with the CFO or the senior most functionary responsible for company's finance and accounts. Based on such an undertaking, the trading member can book ETCD contracts beyond fifty per cent of the limit and up to limit mentioned in paragraph (i) above. For all other participants having an underlying foreign currency exposur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erseas counterparties, AD Category I banks may issue guarantees/standby letters of credit to cover these specific payment obligations related to commodity derivatives, subject to the conditions/guidelines in Annex XV. It is clarified that the term Board, wherever used refers to Board of Directors or the equivalent forum in case of partnership or proprietary firms. The facility is divided into following categories: I) Delegated Route a. Hedging of price risk on actual Import/Export of commodities Participants Users: Companies in India engaged in import and export of commodities Facilitators: AD Category I banks. Purpose: To hedge price risk of the imported/exported commodity Products: Standard exchange traded futures and options (purchases only) in international commodity exchanges. If risk profile warrants -may use OTC contracts overseas. Operational Guidelines AD Category I banks satisfying certain minimum norms, and authorized by the Reserve Bank may grant permission to companies listed on a recognized stock exchange to hedge price risk on import/ export in respect of any commodity (except gold, silver, platinum) in the international commodity exchanges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commodity exchanges. If risk profile warrants - may use OTC contracts overseas. Operational Guidelines: a) AD Category I banks should ensure that permission for hedging ATF is granted only against firm orders. b) AD Category I banks should retain necessary documentary evidence. c) AD Category I banks would require the user to submit a Board resolution certifying Board approved policies which define the overall framework within which derivatives activities should be conducted and the risks controlled. d) All other conditions and guidelines as per Annex XI (A B) should be complied with. (iii) Domestic purchases of crude oil and sales of petro-products Participants Users: Domestic crude oil refining companies. Facilitators: AD Category I banks Purpose: To hedge commodity price risk on domestic purchases of crude oil and domestic sales of petroleum products, which are linked to international prices. Products: Standard exchange traded futures and options (purchases only) in international commodity exchanges. If risk profile warrants - may use OTC contracts overseas. Operational Guidelines: a) The hedging will be allowed strictly on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry in the mainland or within the SEZs as far as its import/export transactions are concerned.) NOTE: The detailed guidelines in respect of Delegated Route and Approval Route are given in the Annex XI and XII respectively. 8. Freight hedging Domestic oil refining companies and shipping companies exposed to freight risk, are permitted to hedge their freight risk by the AD Category I banks authorized by the Reserve Bank. Other companies exposed to freight risk can seek prior permission from the Reserve Bank through their AD Category I bank. It may be noted that the role of Authorized Dealer banks here is primarily to provide facilities for remitting foreign currency amounts towards margin requirements from time to time, subject to verification of the underlying exposure. This facility must not be used in conjunction with any other derivative product. The facility is divided into following categories: I) Delegated Route Participant: Users: Domestic oil-refining companies and shipping companies. Facilitators: AD Category I banks, specifically authorized by the Reserve Bank i.e. those who have been delegated the authority to grant permission to listed companies to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of owned / controlled ships of the shipping company which have no committed employment. The quantum of hedge will be determined by the number and capacity of these ships. The same may be certified by the statutory auditor and submitted to the AD Category I bank. Contracts booked will have to be regularized by production of underlying documents i.e. employment of the ship during the currency of the hedge. An undertaking may be obtained from the company to this effect. AD Category I banks may also ensure that the freight derivatives being entered into by the shipping companies are reflective of the underlying business of the shipping companies. II) Approval Route Participants Users: Companies (other than domestic oil-refining companies and shipping companies) who are exposed to freight risk Facilitators : AD Category I banks Purpose: To hedge freight risk Products: Plain vanilla Over the Counter (OTC) or exchange traded products in the international market / exchange. Operational Guidelines The maximum tenor permissible will be one year forward. The exchanges on which the products are purchased must be a regulated entity in the host countr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I wishes to enter into a hedge contract for the exposure relating to that part of the securities held by it against which it has issued any PN/ODI, it must have a mandate from the PN/ODI holder for the purpose. Further, while AD Category bank is expected to verify such mandates, in cases where this is rendered difficult, they may obtain a declaration from the FII regarding the nature/structure of the PN/ODI establishing the need for a hedge operation and that such operations are being undertaken against specific mandates obtained from their clients. b) AD Category I banks may undertake periodic reviews, at least at quarterly intervals, on the basis of market price movements, fresh inflows, amounts repatriated and other relevant parameters to ensure that the forward cover outstanding is supported by underlying exposures. In this context, it is clarified that in case an FII intends to hedge the exposure of one of its sub-account holders, (cf paragraph 4 of schedule 2 to Notification No. FEMA 20/2000-RB dated 3rd May 2000) it will be required to produce a clear mandate from the sub-account holder in respect of the latter s intention to enter into the derivative transaction. Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had been remitted in foreign currency. 2. Terms and conditions for Foreign Portfolio Investors participating in the Exchange Traded Currency Derivatives (ETCD) [Refer Part A, sub-paragraphs (4) (5)] Foreign portfolio investors (FPIs) eligible to invest in securities as laid down in Schedules 2, 5, 7 and 8 of the Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000 (FEMA 20/2000-RB dated May 3, 2000 (GSR 406 (E) dated May 3, 2000)) as amended from time to time may enter into currency futures or exchange traded currency options contracts subject to the following terms and conditions: FPIs will be allowed access to the currency futures or exchange traded currency options for the purpose of hedging the currency risk arising out of the market value of their exposure to Indian debt and equity securities. Such investors can participate in the currency futures / exchange traded options market through any registered / recognised trading member of the exchange concerned. FPIs can take position - both long(bought) as well as short(sold) - in USD-INR pair upto USD 15 million per exchange. In addition, they shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign exchange contracts with rupee as one of the currencies, and foreign currency-INR options. Additionally, for balances in FCNR (B) accounts - Cross currency (not involving the rupee) forward contracts to convert the balances in one foreign currency to other foreign currencies in which FCNR (B) deposits are permitted to be maintained. 4. Facilities for Hedging Foreign Direct Investment in India Purpose To hedge exchange rate risk on the market value of investments made in India since January 1, 1993, subject to verification of the exposure in India To hedge exchange rate risk on dividend receivable on the investments in Indian companies To hedge exchange rate risk on proposed investment in India Products Forward foreign exchange contracts with rupee as one of the currencies and foreign currency-INR options. Operational Guidelines, Terms and Conditions a) In respect of contracts to hedge exchange rate risk on the market value of investments made in India, contracts once cancelled are not eligible to be rebooked. The contracts may, however, be rolled over. b) In respect of proposed foreign direct investments, following conditions would apply: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lying trade transaction and offer a forward price (no two-way quotes should be given) to the overseas bank who, in turn, will offer the same to its customer. The AD bank, therefore, will not be dealing directly with the overseas importer / exporter. The amount and tenor of the hedge should not exceed that of the underlying transaction and should be in consonance with the extant regulations regarding tenor of payment / realization of the proceeds. On due date, settlement is to be done through the correspondent bank s Vostro or the AD bank s Nostro accounts. The contracts, once cancelled, cannot be rebooked. The contracts may, however, be rolled over on or before maturity subject to maturity of the underlying exposure. On cancellation of the contracts, gains may be passed on to the customer subject to the customer providing a declaration that he is not going to rebook the contract or that the contract has been cancelled on account of cancellation of the underlying exposure. In case the underlying trade transaction is extended, rollover can be permitted once based on the extension of the underlying trade transaction for which suitable documentation is to be provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the overseas bank and the same procedure followed as in case of the original contract. 6. Facilities for Hedging of ECBs, designated in Indian Rupees, in India Purpose To hedge the currency risk arising out of ECBs designated in INR with AD Category- I banks in India. Products Forward foreign exchange contracts with rupee as one of the currencies, foreign currency-INR options and foreign currency-INR swaps. Operational Guidelines, Terms and Conditions The foreign equity holder / overseas organisation or individual approaches the AD bank in India with a request for forward cover in respect of underlying transaction for which he needs to furnish appropriate documentation (scanned copies would be acceptable), on a pre-deal basis to enable the AD bank in India to satisfy itself that there is an underlying ECB transaction, and details of his overseas banker, address, etc. The following undertakings also need to be taken from the customer - That the same underlying exposure has not been hedged with any other AD Category- I bank/s in India. If the underlying exposure is cancelled, the customer will cancel the hedge contract immediately. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of the contracts cancelled. The forward contracts booked may, however, be rolled over on or before maturity. The cost of hedge should be met out of repatriable funds and /or inward remittance through normal banking channel. All outward remittances incidental to the hedge are net of applicable taxes. For IPO related transient capital flows QFIs can undertake foreign currency- rupee swaps only for hedging the flows relating to the IPO under the ASBA mechanism. The amount of the swap should not exceed the amount proposed to be invested in the IPO. The tenor of the swap should not exceed 30 days. The contracts, once cancelled, cannot be rebooked. Rollovers under this scheme will also not be permitted. Operational Guidelines, Terms and Conditions The operational guidelines as outlined for FIIs would be applicable, with the exception of the provision relating to rebooking of cancelled contracts. All foreign exchange derivative contracts permissible for a resident outside India other than a FII, once cancelled, are not eligible to be rebooked. SECTION III Facilities for Authorised Dealers Category-I 1. Management of Banks Assets-Liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parked in nostro accounts. Foreign currency funds accruing out of hedging should not be parked in Nostro accounts but should remain swapped with banks in India at all times. The forward contracts should be for tenors of one or more years and may be rolled over on maturity. Rebooking of cancelled hedges will require prior approval of the Reserve Bank. b) Tier II capital - Foreign banks are permitted to hedge their Tier II capital in the form of Head Office borrowing as subordinated debt, by keeping it swapped into rupees at all times in terms of DBOD circular No.IBS.BC.65/23.10.015/2001-02 dated February 14, 2002. Banks are not permitted to enter into foreign currency-INR swap transactions involving conversion of fixed rate rupee liabilities in respect of Innovative Tier I/Tier II bonds into floating rate foreign currency liabilities. 4. Participation in the currency futures market in India Please refer to Part-A Section I, paragraph 4. In continuation of the same: a) AD Category I Banks may be guided by the DBOD instructions vide DBOD.No.FSD.BC.29/24.01.001/2008-09 dated August 6, 2008. b) AD Category I Banks are permitted to become trading and clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. b) 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. c) 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 PART B ACCOUNTS OF NON-RESIDENT BANKS 1. General (i) Credit to the account of a non-resident bank is a permitted method of payment to non-residents and is, therefore, subject to the regulations applicable to transfers in foreign currency. (ii) Debit to the account of a non-resident bank is in effect an inward remittance in foreign currency. 2. Rup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. If overdrafts in excess of the above limit are not adjusted within five days a report should be submitted to the Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Mumbai 400001 within 15 days from the close of the month, stating the reasons thereof. Such a report is not necessary if arrangements exist for value dating. (ii) AD Category I bank wishing to extend any other credit facility in excess of (i) above to overseas banks should seek prior approval from the Principal Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, 11th Floor, Mumbai, 400001. 9. Rupee Accounts of Exchange Houses Opening of Rupee accounts in the names of Exchange Houses for facilitating private remittances into India requires approval of the Reserve Bank. Remittances through Exchange Houses for financing trade transactions are permitted upto ₹ 5,00,000 per transaction. PART C INTER-BANK FOREIGN EXCHANGE DEALINGS 1. General The Board of Directors of AD Category I banks should frame an appropriate policy and fix suitable limits for various Treasury functions. 2. Position and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (iii) AD Category I banks may also invest the un-deployed FCNR (B) funds in overseas markets in long-term fixed income securities subject to the condition that the maturity of the securities invested in do not exceed the maturity of the underlying FCNR (B) deposits. (iv) Foreign currency funds representing surpluses in the nostro accounts may be utilised for: a) making loans to resident constituents for meeting their foreign exchange requirements or for the Rupee working capital/capital expenditure needs of exporters/ corporates who have a natural hedge or a risk management policy for managing the exchange risk subject to the prudential/interest-rate norms, credit discipline and credit monitoring guidelines in force. b) extending credit facilities to Indian wholly owned subsidiaries/ joint ventures abroad in which at least 51 per cent equity is held by a resident company, subject to the guidelines issued by Reserve Bank (Department of Banking Operations Development). (v) AD Category I banks may write-off/transfer to unclaimed balances account, un-reconciled debit/credit entries as per instructions issued by Department of Banking Operations and Development, from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offices of foreign banks with their branches in India as Tier II capital. Capital funds raised/augmented by the issue of Innovative Perpetual Debt Instruments and Debt Capital Instruments, in foreign currency, in terms of Circulars DBOD.No.BP.BC.57/21.01.002/2005-06 dated January 25, 2006, DBOD.No.BP.BC.23/21.01.002/2006-07 dated July 21, 2006 and Perpetual Debt Instruments and Debt Capital Instruments in foreign currency issued in terms of circular DBOD.No.BP.BC.98/21.06.201/2011-12 dated May 2, 2012. Any other overseas borrowing with the specific approval of the Reserve Bank. d) Interest on loans/overdrafts may be remitted (net of taxes) without the prior approval of Reserve Bank. e) The borrowings beyond 50 per cent of unimpaired Tier I capital of AD Category - I banks will be subject to the following conditions: The bank should have a Board approved policy on overseas borrowings which shall contain the risk management practices that the bank would adhere to while borrowing abroad in foreign currency. The bank should maintain a CRAR of 12.0 per cent. The borrowings beyond the existing ceiling shall be with a minimum maturity of three years. All othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents under the facility of booking forward contracts on past performance basis, as per the format in Annex-X. The report may also be forwarded by e-mail so as to reach the Department by the 10th of the following month. vii) The Head/Principal Office of each AD Category-I banks should submit a statement in form BAL giving details of their holdings of all foreign currencies on fortnightly basis through Online Returns Filing System (ORFS) within seven calendar days from the close of the reporting period to which it relates. viii) A monthly statement should be furnished before the 10th of the succeeding month, in respect of cover taken by FII, indicating the name of the FII / fund, the eligible amount of cover, the actual cover taken, etc. as per the format in Annex XIII. ix) The Head/Principal Office of each AD Category-I banks should furnish an up-to-date list (in triplicate) of all its offices/branches, which are maintaining Rupee accounts of non-resident banks as at the end of December every year giving their code numbers allotted by Reserve Bank. The list should be submitted before 15th January of the following year. The offices/branches should be classified according to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: spot transactions which are not yet settled; forward transactions; Guarantees and similar commitments denominated in foreign currencies which are certain to be called; Net future income/expenses not yet accrued but already fully hedged (at the discretion of the reporting bank); Net of amounts to be received/paid in respect of currency futures, and the principal on currency futures/swaps. c) Net Options Position The options position is the delta-equivalent spot currency position as reflected in the authorized dealer's options risk management system, and includes any delta hedges in place which have not already been included under 1(a) or 1(b) (i) and (ii) above. 2. Calculation of the Overall Net Open Position T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd adherence to the limits. ii. Authorized Dealers should also have a system in place to demonstrate, whenever required, the various components of the NOOP as prescribed in the guidelines for verification by Reserve Bank. iii. Transactions undertaken by Authorized Dealers till the end of business day may be computed for calculation of Foreign Exchange Exposure Limits. The transactions undertaken after the end of business day may be taken into the positions for the next day. The end of day time may be approved by the bank s Board. ii. Limit for positions involving Rupee as one of the currencies (NOP-INR) for exchange rate management NOP-INR may be prescribed to Authorised Dealers at the discretion of the Reserve Bank of India depending on the market conditions. The NOP-INR positions may be calculated by netting off the long short onshore positions (as arrived at by the short hand method) plus the net INR positions of offshore branches. Positions undertaken by banks in currency futures / options traded in exchanges will form part of the NOP-INR. As regards option position, any excesses on account of large option Greeks during volatile market closing / revalu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions should be reported in the respective columns. For example in a EUR/USD purchase contract, the EUR amount should be included in the purchase side while the USD amount should be included in the sale side. 5. Transactions with RBI should be included in inter-bank transactions. Transactions with financial institutions other than banks authorised to deal in foreign exchange should be included under merchant transactions. GPB 1. Foreign Currency Balances - Cash balances and investments in all foreign currencies should be converted into US dollars and reported under this head. 2. Net open exchange position- This should indicate the overall overnight net open exchange position of the authorised dealer category-I in Rs. Crore. The net overnight open position should be calculated on the basis of the instructions given in Annex I. 3. Of the above FCY/INR- The amount to be reported is the position against the Rupee- i.e. the net overnight open exchange position less cross currency position, if any. Formats of FTD and GPB Statements FTD Statement showing daily turnover of foreign exchange dated Merchant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 INR 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. This statement should be addressed to The Director, Division of International Finance, Department of Economic Analysis and Policy, Reserve Bank of India, Central Office Building, 8th Floor, Mumbai- 400 001. Phone: 022- 2266 3791. Fax- 022 2262 2993, 2266 0792. Annex IV [see Part D, paragraph (iii)] Cross- currency derivative transactions - statement for the half-year ended . Product No. of transactions Notional principal amount in USD Interest rate swaps Currency swaps Coupon swaps Foreign currency options ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refer to the facility of booking of Forward or Option Contracts involving Foreign Exchange, based on the past performance facility with Authorised Dealer Category I Banks (AD Category I Banks), more specifically in relation to the undertaking submitted by us to you, dated [ ] in this regard ( Undertaking ). In accordance with the said Undertaking, we hereby furnish a declaration regarding the amounts of the transactions booked by us with all AD Category I banks. We are availing the past performance limit with the following AD Category I banks : . Please find below the information regarding amounts booked / cancelled with all AD Category I Banks under the said past performance facility as permitted under the FEMA Regulations : (Amount in US Dollar) Eligible limit under past performance Aggregate amount of contracts booked with all the ADs from April till date Amount of contracts cancelled with all ADs from April till date _______ Amount of contracts o/s with all ADs as on date Amount utilised (by delivery of documents) as on date Available lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Client/C-party Name Notional Option Call/Put Strike Maturity Premium Purpose* *Mention balance sheet, trading or client related. II. Option Positions Report Currency Pair Notional Outstanding Net Portfolio Delta Net Portfolio Gamma Net Portfolio Vega calls puts USD-INR USD USD USD EUR-INR EUR EUR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annex IX [See Part C, paragraph 5 (a)] Overseas foreign currency borrowings -Report as on .. Amount (in equivalent USD* Million) Bank (SWIFT code) Unimpaired Tier-I capital as at the close of previous quarter. Borrowings in terms of PartC para 5 (a) of Master Circular on Risk Mgmt. and Inter-Bank Dealings dated July 1, 2009 Borrowings in excess of the above limit for replenishment. Of Rupee resources @ External Commercial Borrowings Borrowings under following scheme as per IECD Master Circular on Export Credit in Foreign Currency dated July 1, 2003 Regulation 4.2(iv) of Notification No. FEMA 3/2000-RB dated May 3, 2000 (a) Lines of Credit for extending Pre-Shipment Credit in Foreign Currency (PCFC) (b) Bankers Acceptance Facility (BAF) / Loan from overseas for extending Redisctg. Of Export Bills Abroad Scheme (EBR) A 1 2 3 4a 4b Subord. Debt in foreign currency for inclusion in Tier-II ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk identification risk measurements guidelines and procedures to be followed with respect to revaluation and/or monitoring of positions names and designations of officials authorized to undertake transactions and limits 4. Authorised Dealers may refuse to undertake any hedge transaction if it has a doubt about the bonafides of the transaction or the corporate is not exposed to price risk. The conditions subject to which ADs would grant permission to hedge and the guidelines for monitoring of the transactions are given below. It is clarified that hedging the price risk on domestic sale/purchase transactions in the international exchanges/markets, even if the domestic price is linked to the international price of the commodity, is not permitted, except certain specified transactions as approved/may be approved by the Reserve Bank. Necessary advice may be given to the customers before they start their hedging activity. 5. AD Banks may submit an annual report to the Principal Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Central Office, Forex Markets Division, Mumbai - 400 001 as on March 31 every year, within one month, giving the names ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record for internal audit/inspection. B. Hedging of commodity price risk on petroleum petroleum Products by domestic crude oil refining companies 1. The hedging has to be undertaken only through AD Category I banks, subject to conditions and guidelines as also given in (a) and (b) of this Annex. 2. While extending the above hedging facilities, AD Category I banks should ensure that the domestic crude oil refining companies hedging their exposures should comply with the following: to have Board approved policies which define the overall framework within which derivatives activities are undertaken and the risks contained; sanction of the company's Board has been obtained for the specific activity and also for dealing in OTC markets; the Board approval must include explicitly the mark-to-market policy, the counterparties permitted for OTC derivatives, etc.; and domestic crude oil companies should have put up the list of OTC transactions to the Board on a half yearly basis, which must be evidenced by the AD Category I bank before permitting continuation of hedging facilities under this scheme. 3. The AD Category I banks should also ensure user approp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Part B - Details of transactions permitted to be cancelled and rebooked Name of FII Market Value as determined at start of year (USD Million) Eligibility for Forward cover Forward Contracts Booked Forward Contracts Cancelled Total forward cover outstanding During the month Cumulative Total - Year to Date During the month Cumulative total - Year to date Name of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orting date; The companies follow the Accounting Standards notified under section 211 of the Companies Act, 1956 and other applicable Guidance of the Institute of Chartered Accountants of India (ICAI) for such products/ contracts as also the principle of prudence which requires recognition of expected losses and non-recognition of unrealized gains; Disclosures are made in the financial statements as prescribed in ICAI press release dated 2nd December 2005; and The companies have a risk management policy with a specific clause in the policy that allows using the type/s of cost reduction structures. (Note: The above accounting treatment is a transitional arrangement till AS 30 / 32 or equivalent standards are notified.) Operational Guidelines, Terms and Conditions Writing of options by the users, on a standalone basis is not permitted. Users can however, write options as part of cost reduction structures, provided, there is no net receipt of premium. Leveraged structures, Digital options, Barrier options and any other exotic products are not permitted. The delta of the options should be explicitly indicated in the term sheet. The portion of the struct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. of derivative transactions cancelled along with cancellation of the underlying trade transaction and amount involved Action taken by the AD Cat I bank Appendix List of Circulars/Notifications which have been consolidated in the Master Circular on Risk Management and Inter-Bank Dealings Sr. No. Notification / Circular Date 1. Notification No. FEMA 25/2000-RB May 3, 2000 2. Notification No. FEMA 28/2000-RB September 5, 2000 3. Notification No. FEMA 54/2002-RB March 5, 2002 4. Notification No. FEMA 66/2002-RB July 27, 2002 5. Notification No. FEMA 70/2002-RB August 26, 2002 6. Notification No. FEMA 81/2003-RB January 8, 2003 7. Notification No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. A.P.(DIR Series) Circular No. 47 December 12, 2003 8. A.P.(DIR Series) Circular No. 81 March 24, 2004. 9. A.P.(DIR Series) Circular No 26 November 1, 2004 10. A.P.(DIR Series) Circular No 47 June 23, 2005 11. A.P.(DIR Series) Circular No 03 July 23, 2005 12. A.P.(DIR Series) Circular No 25 March 6, 2006 13. EC.CO.FMD. No.8/02.03.75/2002-03 February 4, 2003 14. EC.CO.FMD. No.14/02.03.75/2002-03 May 9, 2003 15. EC.CO.FMD.No. 345/02.03.129(Policy)/2003-04 November 5, 2003 16. FE.CO.FMD.1072/02.03.89/2004-05 February 8, 2005 17. FE.CO.FMD. 2/02.03.129(Policy)/2005-06 November 7, 2005 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41 A.P.(DIR Series) Circular No.63 December 29, 2011 42 A.P.(DIR Series) Circular No.68 January 17, 2012 43 A.P.(DIR Series) Circular No.122 May 09, 2012 44 A.P.(DIR Series) Circular No.3 July 11, 2012 45 A.P.(DIR Series) Circular No.13 July 31, 2012 46 A.P.(DIR Series) Circular No.21 August 31, 2012 47 A.P.(DIR Series) Circular No.30 September 12, 2012 48 A.P.(DIR Series) Circular No.45 October 22, 2012 49 A.P.(DIR Series) Circular No.86 March 1, 2013 50 A.P. (DIR Series) Circular No.121 June 26, 2013 51 A.P. (DIR Series) Circular No.2 July 4, 2013 52 A.P. (DIR Series) Circular No.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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