**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. It mandates enhanced transparency in cost disclosure to retail users for specific foreign exchange contracts. The instructions are effective three months from the date of issuance.
**Key Points / Main Content**
* **Scope:** The circular pertains to foreign exchange contracts involving INR or otherwise, including:
* Foreign exchange cash
* Foreign exchange tom
* Foreign exchange spot
* Foreign exchange derivative contracts
* Foreign currency interest rate derivative contracts
* **Disclosure Requirements for Derivatives:**
* 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.
* This information must be included in the deal confirmation/term sheet.
* **Disclosure Requirements for Cash/Tom/Spot Transactions:**
* When offering foreign exchange cash, foreign exchange tom, and foreign exchange spot contracts to a retail user, Authorised Dealers must provide details of the total transaction cost to the user before entering into the contract.
* The total transaction cost must include all relevant costs and charges (e.g., sending/receiving fees, intermediary fees, exchange rate, and currency conversion charges).
* This information must also be included in the deal confirmation.
* **Definitions:** "Retail user" and "Authorised Dealer" have the same meaning as in the Master Direction.
* **Authority:** 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: All Authorised Dealers**
**Impact**
They are required to enhance cost transparency when dealing with retail users for specific foreign exchange contracts. They need to adjust their processes to comply with the new disclosure requirements.
**Action Required**
Ensure compliance with the enhanced disclosure requirements for transaction costs to retail users before entering into relevant contracts. Update systems and documentation to include the necessary information in deal confirmations and term sheets.
Key Entities Referenced
Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016: A key policy document amended from time to time, governing risk management and inter-bank dealings, which Authorized Dealers must follow.
Reserve Bank of India Act, 1934: The act under which the directions in the circular are issued, specifically Section 45W, giving the Reserve Bank of India its regulatory authority.
Foreign Exchange Management Act, 1999: The act under which the directions in the circular are issued, specifically Sections 10(4) and 11(1), related to foreign exchange management.
Reserve Bank of India: The issuing authority of the circular, responsible for regulating financial markets and banking operations in India.
Authorised Dealers: Entities regulated by the circular, who are permitted to offer foreign exchange contracts and must disclose transaction costs.
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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