Executive Summary:
This circular addresses the diversification of activities by Standalone Primary Dealers (SPDs), specifically reviewing permissible non-core activities and related prudential regulations. It allows SPDs to undertake foreign exchange activities as part of their non-core business, subject to authorization from the Reserve Bank of India (RBI). The circular also permits SPDs to become trading and self-clearing members for proprietary transactions in equity and equity derivatives markets.
Key Points / Main Content:
Foreign Exchange Activities:
* Foreign exchange activities remain part of SPDs' non-core activities.
* SPDs must seek authorization from the RBI's Foreign Exchange Department to undertake foreign exchange activities.
* The RBI reserves the right to restrict or withdraw permission for foreign exchange business if SPDs fail to meet obligations in the government securities market or violate PD business regulations.
Prudential Regulations for Foreign Exchange Activities:
* Capital charge for market risk in foreign exchange exposures must be the higher of charges worked out by the standardised approach and the internal risk management framework-based Value at Risk (VaR) model.
* Under the standardised approach, SPDs must maintain a market risk capital charge of 15% for net open positions limits or actual, whichever is higher, arising out of forex business with a risk weight of 100.
* The capital charge for market risk calculated for all permissible non-core activities, including foreign exchange activities, shall not exceed 20% of the Net Owned Fund of the SPD.
Compliance and Directions:
* SPDs must comply with FEMA provisions and related rules, regulations, and directions.
* Applicable directions include:
* Master Direction - Risk Management and Inter-Bank Dealings dated July 05, 2016 (as amended).
* Master Direction - Reserve Bank of India (Market-makers in OTC Derivatives) Directions, 2021 dated September 16, 2021 (as amended).
* Guidelines for Internal Control over Foreign Exchange Business dated February 03, 2011 (as amended).
Equity and Equity Derivatives Trading:
* SPDs are permitted to take up trading and self-clearing membership with SEBI-approved stock exchanges/clearing corporations for proprietary transactions in the equity and equity derivatives market.
* SPDs must comply with SEBI regulatory norms and the eligibility criteria/rules of stock exchanges and clearing corporations.
Master Direction Amendment:
* The Master Direction - Standalone Primary Dealers (Reserve Bank Directions), 2016 dated August 23, 2016, is being modified accordingly.
Impact Analysis
Standalone Primary Dealers (SPDs):
Impact: SPDs are now permitted to engage in foreign exchange activities as non-core business and can become trading and self-clearing members in equity and equity derivatives markets. They are subject to prudential regulations, capital adequacy guidelines, and compliance with FEMA and other RBI directions.
Action Required: SPDs desirous of undertaking foreign exchange activities must approach the RBI's Foreign Exchange Department for authorization. SPDs need to ensure compliance with all specified regulations and guidelines, including capital adequacy, risk management, and reporting requirements. They also need to adhere to SEBI norms and stock exchange rules if engaging in equity and equity derivatives trading.
Reserve Bank of India (RBI):
Impact: The RBI is responsible for overseeing and regulating the expanded activities of SPDs.
Action Required: The RBI needs to process authorization requests from SPDs for foreign exchange activities, monitor SPDs' compliance with the new regulations, and enforce these regulations as needed, including the potential imposition of restrictions or withdrawal of permissions. Additionally, they need to ensure the Master Direction is appropriately modified.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the Indian financial system.
Standalone Primary Dealers (SPDs): Entities authorized by the Reserve Bank of India to deal in government securities.
Foreign Exchange Department, Central Office, Mumbai: A department within the Reserve Bank of India responsible for regulating foreign exchange activities.
Government securities market: The market where government-issued securities are traded.
Master Circular Basel III Capital Regulations dated April 01, 2022: A Reserve Bank of India circular outlining regulations related to capital adequacy under the Basel III framework.
Master Direction Standalone Primary Dealers Reserve Bank Directions, 2016: A Reserve Bank of India master direction providing guidelines and regulations for standalone primary dealers.
Master Direction Risk Management Inter-Bank Dealings dated July 05, 2016: A Reserve Bank of India master direction outlining guidelines for risk management in inter-bank dealings.
Securities and Exchange Board of India (SEBI): The regulatory body for the securities market in India.
भारतीय �रज़व र् बक�
RESERVE BANK OF INDIA
www.rbi.org.in
RBI/2022-23/127
DOR.FIN.REC.No.73/03.10.117/2022-23 October 11, 2022
All Standalone Primary Dealers (SPDs)
Dear Sir/ Madam,
Diversification of activities by SPDs – Review of permissible non-core activities – Prudential
regulations and other instructions
Please refer to the circular DOR.FIN.REC.No.72/03.10.117/2022-23 dated October 11, 2022
allowing SPDs to undertake foreign exchange activities as part of their non-core activities. In this
connection, SPDs shall adhere to the prudential regulations and other instructions contained in this
circular and other associated guidelines applicable to SPDs.
2. The foreign exchange activities permitted to SPDs shall continue to be part of their non-core
activity. SPDs desirous of undertaking this activity may approach the Reserve Bank of India,
Foreign Exchange Department, Central Office, Mumbai for necessary authorization. It may be
noted that in case of failure of SPDs to meet the obligations of Primary Dealership (PD) business
in the Government securities market or any other violations on regulations on conducting the PD
business, the Reserve Bank reserves the right to impose restrictions or withdraw permission to
undertake the foreign exchange business.
3. The SPDs shall adhere to the following prudential regulations:
a. As prescribed in the existing capital adequacy guidelines for SPDs, the capital charge for
market risk in foreign exchange exposures shall be higher of the charges worked out by
the standardised approach and the internal risk management framework-based Value at
Risk (VaR) model. Further, under the standardised approach, SPDs shall maintain a
market risk capital charge of 15% for net open positions (limits or actual, whichever is
higher) arising out of forex business with a risk weight of 100%. The net open position for
foreign exchange exposures shall be calculated as per the methodology prescribed in
para 8.5 of Master Circular – Basel III Capital Regulations dated April 01, 2022 (as
amended from time to time) to the extent applicable to SPDs. Capital charge for market
risk shall be over & above the capital charge for credit risk of 15% as per directions
िविनयमन िवभाग, क�िद्रय काया�लय, दुसरी मंिजल, मु� काया�लय भवन, फोट�, मुंबई 400 001
दूर�नी:22153413, फै�:22162768 ई मेल:cgmicdor@rbi.org.in
Department of Regulation, Central Office, 2nd Floor, Main Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai – 400 001
Tel No: 22153413, Fax No:22162768 Email: cgmicdor@rbi.org.in
िहंदी आसान है ,इसका प्रयोग बढाईयेprescribed in Master Directions – Standalone Primary Dealers (Reserve Bank) Directions,
2016 dated August 23, 2016 (as amended from time to time).
b. In addition to the foreign exchange exposure limits prescribed under Master Direction –
Risk Management & Inter-Bank Dealings dated July 05, 2016 (as amended from time to
time), the capital charge for market risk (calculated as per provisions of Master Direction
– Standalone Primary Dealers (Reserve Bank) Directions, 2016) for all the permissible
non-core activities, including foreign exchange activities, shall not be more than 20% of
the Net Owned Fund of the SPD as per last audited balance sheet.
4. SPDs shall continue to comply with the provisions of FEMA and all rules, regulations and
directions issued thereunder; and also, the following directions to the extent applicable:
a. Master Direction – Risk Management and Inter-Bank Dealings dated July 05, 2016 (as
amended from time to time).
b. Master Direction – Reserve Bank of India (Market-makers in OTC Derivatives) Directions,
2021 dated September 16, 2021 (as amended from time to time).
c. Guidelines for Internal Control over Foreign Exchange Business - FE.CO.FMD.No.18380/
02.03.137/2010-11 dated February 03, 2011 (as amended from time to time).
5. Further, reference is also drawn to sub-clause (i)(a) of para 12(5) of Master Direction –
Standalone Primary Dealers (Reserve Bank) Directions, 2016 in terms of which SPDs are
permitted to undertake investment/ trading in equity and equity derivatives market as a part of their
non-core activity. On a review, it has been decided to permit SPDs to take up trading and self-
clearing membership with SEBI approved stock exchanges/ clearing corporations for undertaking
proprietary transactions in equity and equity derivatives market as permitted in sub-clause (i)(a) of
para 12(5) of the aforementioned Master Direction for SPDs. While doing so, SPDs shall comply
with all the regulatory norms laid down by SEBI and all the eligibility criteria/ rules of stock
exchanges and clearing corporations.
6. The Master Direction – Standalone Primary Dealers (Reserve Bank) Directions, 2016 dated
August 23, 2016 is being modified accordingly.
Yours faithfully,
(J.P. Sharma)
Chief General Manager
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