**Executive Summary**
This document from the Reserve Bank of India, Financial Markets Regulation Department, addresses the disclosure of transaction costs for foreign exchange transactions. It references the "Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016" and mandates enhanced cost transparency for Authorised Dealers, particularly when dealing with retail users. These instructions take effect three months from the date of issuance.
**Key Points / Main Content**
* **Scope:** The circular applies to foreign exchange contracts, including:
* Foreign exchange cash.
* Foreign exchange tom.
* Foreign exchange spot.
* Foreign exchange derivative contracts.
* Foreign currency interest rate derivative contracts.
* **Foreign Exchange Derivative / Foreign Currency Interest Rate Derivative Disclosure:**
* When offering these to retail users, Authorised Dealers must provide the mid-market mark/bid and ask price *before* entering into the contract.
* This price must also be included in the deal confirmation/term sheet.
* **Foreign Exchange Cash, Tom, and Spot Contract Disclosure:**
* When offering these to retail users, Authorised Dealers must provide details of the total transaction cost *before* entering into the contract.
* The transaction cost must include all relevant costs and charges (sending/receiving fees including intermediaries, foreign exchange rate, and currency conversion charges).
* This total cost must also be included in the deal confirmation.
* **Effective Date:** The new instructions become effective three months from the date of issuance of the instructions.
* **Definitions:** "Retail user" and "Authorised Dealer" have the same meaning as assigned in the Master Direction.
* **Legal Basis:** The circular is 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:** Requires significant changes to their operational procedures for disclosing transaction costs to retail users *before* contracts are finalized, ensuring transparency.
* **Action Required:** Implement systems to accurately calculate and disclose all transaction costs for foreign exchange cash, tom, spot, and derivative contracts to retail users. Adjust deal confirmation and term sheet formats to include the required information.
**Stakeholder: Retail Users**
* **Impact:** Receive more comprehensive information about the total transaction cost of foreign exchange transactions.
* **Action Required:** Review the details of the transaction cost before entering into any contracts with Authorised Dealers.
Key Entities Referenced
Reserve Bank of India: Regulator issuing directions on disclosure of transaction costs for foreign exchange transactions.
Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016: Referenced policy document providing definitions and context for the current directions.
Foreign Exchange Management Act, 1999: Act under which these directions are issued.
Reserve Bank of India Act, 1934: Act under which these directions are issued.
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
2