**Executive Summary**
This Reserve Bank of India circular addresses the disclosure of transaction costs for foreign exchange transactions by Authorised Dealers, referencing the Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016. The circular mandates increased transparency in cost disclosures for both foreign exchange derivatives and spot contracts offered to retail users. These instructions will be effective three months from the date of issuance.
**Key Points / Main Content**
* **Scope:** The circular applies to foreign exchange contracts involving INR or otherwise, specifically:
* Foreign exchange cash.
* Foreign exchange tom.
* Foreign exchange spot.
* Foreign exchange derivative contracts.
* Foreign currency interest rate derivative contracts.
* **Derivative Contract Disclosure:**
* When offering foreign exchange derivative / foreign currency interest rate derivative to a retail user, Authorised Dealers must provide the mid-market mark/ bid and ask price of the derivative before entering into the contract.
* The mid-market mark/ bid and ask price of the derivative must be included in the deal confirmation / term sheet.
* **Cash, Tom and Spot Contract Disclosure:**
* When offering foreign exchange cash, tom, and spot contracts to a retail user, Authorised Dealers must provide details of the total transaction cost before entering into the contract.
* The total transaction cost must include all relevant costs and charges (sending/receiving fees, intermediary fees, foreign exchange rate, and currency conversion charges).
* These costs must also be included in the deal confirmation.
* **Effective Date:** The instructions are applicable three months from the date of issuance.
* **Definitions:** The terms 'retail user' and 'Authorised Dealer' have the same meaning as defined in the Master Direction.
**Impact Analysis**
**Stakeholder: Authorised Dealers**
* **Impact:** Increased transparency requirements for disclosing transaction costs associated with foreign exchange contracts offered to retail users. Changes to operational procedures and documentation to include detailed cost breakdowns.
* **Action Required:** Update systems and procedures to ensure compliance with the disclosure requirements. Implement mechanisms to calculate and present total transaction costs, including all applicable fees and charges, before entering into contracts with retail users and in deal confirmations/term sheets.
**Stakeholder: Retail Users**
* **Impact:** Enhanced transparency in pricing and cost structures for foreign exchange transactions, enabling better informed decision-making.
* **Action Required:** Review the provided total transaction costs before entering into foreign exchange contracts.
Key Entities Referenced
Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016: A key reference document defining guidelines for risk management and inter-bank dealings, central to the context of the circular.
Reserve Bank of India: The primary regulatory body issuing the circular, responsible for financial markets regulation.
Foreign Exchange Management Act, 1999: Legal act empowering the Reserve Bank of India to issue directions related to foreign exchange transactions.
Reserve Bank of India Act, 1934: The principal act that established the Reserve Bank of India and defines its powers.
Authorised Dealers: Entities regulated by the circular and permitted to offer foreign exchange contracts.
RESERVE BANK OF INDIA
FINANCIAL MARKETS REGULATION DEPARTMENT
9TH FLOOR, CENTRAL OFFICE, FORT
MUMBAI 400 001
To,
All Authorised Dealers
Madam/Sir,
Disclosure of transaction cost for foreign exchange transactions - Draft
A reference is invited to the Master Direction – Risk Management and Inter-Bank
Dealings dated July 05, 2016, as amended from time to time (hereinafter referred as
‘Master Direction’), in terms of which Authorised Dealers have been permitted to offer the
following foreign exchange contracts, involving INR or otherwise, to users (both retail and
non-retail):
a. foreign exchange cash;
b. foreign exchange tom;
c. foreign exchange spot;
d. foreign exchange derivative contracts; and
e. foreign currency interest rate derivative contracts.
2. In terms of the aforesaid Master Direction, while offering foreign exchange derivative /
foreign currency interest rate derivative to a retail user, an Authorised Dealer shall provide
the mid-market mark / bid and ask price of the derivative before entering into the contract
and the same must also be included in the deal confirmation / term sheet.
3. Further to this, on a review, it has been decided that while offering foreign exchange
cash, foreign exchange tom and foreign exchange spot contracts to a retail user,
Authorised Dealers shall provide to the user, details of the total transaction cost (showing
all relevant costs and charges viz., sending and receiving fees including those of any
intermediaries, foreign exchange rate and currency conversion charges), before entering
into the contract and also include the same in the deal confirmation.4. These instructions shall be applicable with effect from three months from the date of
issuance of these instructions.
5. For the purpose of this circular, ‘retail user’ and ‘Authorised Dealer’ shall have the
same meaning as assigned in the Master Direction.
6. The directions contained in this circular have been issued under Section 45W of the
Reserve Bank of India Act, 1934 and Sections 10(4) and 11(1) of the Foreign Exchange
Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals,
if any, required under any other law.
Yours faithfully,
(Dimple Bhandia)
Chief General Manager
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