**Executive Summary**
This Reserve Bank of India (RBI) circular addresses the disclosure of transaction costs for foreign exchange transactions by Authorised Dealers. It is a draft, referencing the Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016. The circular mandates increased transparency in cost disclosure to retail users, with the new instructions effective three months from the date of issuance.
**Key Points / Main Content**
* **Scope**: The circular pertains to Authorised Dealers offering foreign exchange contracts to users, including:
* Foreign exchange cash
* Foreign exchange tom
* Foreign exchange spot
* Foreign exchange derivative contracts
* Foreign currency interest rate derivative contracts
* **Disclosure Requirements for Derivatives (Retail Users)**:
* When offering foreign exchange/foreign currency interest rate derivatives to retail users, Authorised Dealers must provide the mid-market mark/bid and ask price before entering into the contract.
* This information must be included in the deal confirmation/term sheet.
* **Disclosure Requirements for FX Cash, Tom, and Spot (Retail Users)**:
* Authorised Dealers must provide details of the total transaction cost to retail users, showing all relevant costs and charges (sending/receiving fees, intermediary fees, foreign exchange rate and currency conversion charges) before contract execution.
* This must be included in the deal confirmation.
* **Effective Date**:
* These instructions are applicable three months from the date of issuance of the circular.
* **Definitions**:
* The terms "retail user" and "Authorised Dealer" have the meanings as assigned in the Master Direction.
* **Regulatory Basis**:
* The directions are 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.
**Impact Analysis**
**Stakeholder: Authorised Dealers**
* **Impact**: Increased transparency requirements and compliance burden when offering foreign exchange products to retail users.
* **Action Required**: Implement systems and processes to accurately calculate and disclose all transaction costs before contract execution for foreign exchange cash, tom, spot, and derivative contracts offered to retail users. Update deal confirmation/term sheet documentation.
**Stakeholder: Retail Users**
* **Impact**: Enhanced transparency in transaction costs, enabling more informed decision-making regarding foreign exchange transactions.
* **Action Required**: Review the disclosed transaction costs before entering into any foreign exchange contract.
Key Entities Referenced
Reserve Bank of India (RBI): The issuer and enforcer of the policy, the central bank of India.
Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016: A key document that the circular amends/references, containing existing regulations for risk management and inter-bank dealings, which this circular supplements with disclosure requirements.
Foreign Exchange Management Act, 1999: Law under which the directions in the circular are issued, pertaining to foreign exchange management.
Reserve Bank of India Act, 1934: Law under which the directions in the circular are issued. Specifically, section 45W.
Authorised Dealers: Entities regulated by this circular, specifically required to disclose transaction costs for foreign exchange transactions.
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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