Executive Summary:
This circular from the Reserve Bank of India introduces a simplified hedging facility aimed at easing exchange rate risk management by reducing documentation and offering hedging flexibility. It amends the Foreign Exchange Management Regulations and updates the Master Direction on Risk Management and Inter-Bank Dealings. The facility will be effective from January 01, 2018.
Key Points / Main Content:
* **Purpose and Scope:**
* Introduces a simplified hedging facility to streamline exchange rate risk management.
* Applies to exchange rate risk hedging on permissible transactions under FEMA, 1999.
* **Eligibility and Products:**
* Users: Resident and non-resident entities, excluding individuals.
* Products: Any Over the Counter (OTC) derivative or Exchange Traded Currency Derivative (ETCD) permitted under FEMA, 1999.
* **Limits and Designated Bank:**
* Cap on Outstanding Contracts: USD 30 million (or equivalent) on a gross basis.
* Designated Bank: User must appoint an Authorised Dealer Category I (AD Cat-I) bank.
* The designated bank assesses hedging needs and sets limits, extendable up to 150% of the cap.
* **Operational Guidelines:**
* OTC contracts must have underlying cash flow with the same bank.
* Resident unlisted companies with a net worth of at least Rs.200 crores can use cost reduction structures.
* No documentary evidence needed for underlying exposure, but basic transaction details required for OTC hedges.
* Cancelled contracts can be freely rebooked with the same bank.
* Net gains on OTC contracts are transferred upon delivery of underlying cash flow (pro-rata for partial delivery).
* Gains/losses on capital account hedges can be transferred as they accrue if the asset/liability exists.
* No new contracts if the limit is fully utilized or breached; existing contracts continue until expiry or closure.
* Users of this facility cannot use other OTC or ETCD facilities, except as per the above condition.
* At the end of each financial year, a statement must be provided to the designated bank confirming hedge contracts are backed by underlying exposures and are not hedged elsewhere.
* Banks must have an internal policy regarding the time limit up to which a hedge contract for a given underlying can be rolled over or rebooked by the user.
* **Reporting and Monitoring:**
* Designated banks report user details and limits to the Trade Repository (TR).
* Exchanges report user contracts to the TR daily upon TR request.
* The TR computes user-wise outstanding positions across OTC and ETCD markets.
* The TR provides information to the designated bank for monitoring.
* The designated bank advises users to stop booking new contracts if limits are exceeded.
* Designated banks report user migration to other facilities to the TR.
* The TR updates records and notifies exchanges to cease data reporting for migrated users.
Impact Analysis:
* **Authorised Dealer Category I (AD Cat-I) Banks:**
* Impact: Required to act as designated banks, assess hedging requirements, set limits, and monitor user positions.
* Action Required: Establish internal policies, report user details to the Trade Repository (TR), and monitor user positions against the set limits. Bring the circular to the notice of their constituents and customers.
* **Resident and Non-Resident Entities (Excluding Individuals):**
* Impact: Can utilize the simplified hedging facility to manage exchange rate risk, subject to the specified conditions and limits.
* Action Required: Appoint a designated AD Cat-I bank, adhere to the limit on outstanding contracts, provide necessary information to the designated bank, and ensure compliance with the guidelines.
* **Trade Repository (TR):**
* Impact: Plays a central role in collecting and disseminating data on user positions across OTC and ETCD markets.
* Action Required: Collect data from designated banks and exchanges, compute user-wise outstanding positions, and provide this information to the designated banks.
* **Foreign Exchange Dealers Association of India (FEDAI):**
* Impact: Responsible for devising a standardized format for users to provide basic details of underlying transactions.
* Action Required: Devise the Standardized format that will include details like transaction type, i.e. current account import, export or capital account ECB, FPI, FDI etc., amount, currency and tenor.
Key Entities Referenced
Reserve Bank of India: The central bank of India, which issued the circular.
Foreign Exchange Management Act, 1999: An act of the Parliament of India to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.
Foreign Exchange Management Foreign Exchange Derivative Contracts Regulations, 2000: Regulations pertaining to foreign exchange derivative contracts, issued under the Foreign Exchange Management Act.
Master Direction Risk Management and InterBank Dealings: A master direction issued by the Reserve Bank of India concerning risk management and interbank dealings.
Authorised Dealer Category I Banks: Banks authorized by the Reserve Bank of India to deal in foreign exchange.
Simplified Hedging Facility: A scheme introduced by the RBI to simplify the process for hedging exchange rate risk.
Financial Markets Regulation Department, Central Office, Mumbai, Maharashtra: The department within the Reserve Bank of India responsible for financial markets regulation, located in Mumbai.
Foreign Exchange Dealers Association of India: An association of foreign exchange dealers in India. FEDAI.
भारतीय �रज़वर् बैंक
RESERVE BANK OF INDIA
RBI/2017-18/88
A.P. (DIR Series) Circular No. 11 November 09, 2017
To,
All Authorised Dealer Category - I Banks
Madam/Sir,
Risk Management and Inter-Bank Dealings – Simplified Hedging Facility
Attention of Authorised Dealers Category – I (AD Category – I) banks is invited to the
Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations,
2000 dated May 3, 2000 (Notification No.FEMA. 25/RB-2000 dated May 3, 2000) issued
under clause (h) of sub-section (2) of Section 47 of FEMA, 1999 (Act 42 of 1999), as
amended from time to time, the Master Direction - Risk Management and Inter-Bank
Dealings dated July 5, 2016, as amended from time to time, and the announcement
made in the Statement on Developmental and Regulatory Policies Reserve Bank of
India dated August 02, 2017 (para 7) on the simplified hedging facility
2. The scheme of simplified hedging facility was first announced by the RBI in August
2016 and the draft scheme was released on April 12, 2017. The facility is being
introduced with a view to simplify the process for hedging exchange rate risk by
reducing documentation requirements, avoiding prescriptive stipulations regarding
products, purpose and hedging flexibility, and to encourage a more dynamic and
efficient hedging culture.
िव�ीय बाज़ार िविनयमन िवभाग, केंद्रीय कायार्लय, पहली मंिजल, मख्ु य भवन, शहीद भगत िसंह मागर्, फोटर्, मंबु ई – 400001, भारत
फोन: (91-22) 2260 3000, फैक्स: (91-22) 22702290, ई-मेल: cgmfmrd@rbi.org.in
Financial Markets Regulation Department, Central Office, 1st Floor, Main Building, Shahid Bhagat Singh Road, Fort, Mumbai – 400001, India
Tel: (91-22) 2260 3000, Fax: (91-22) 22702290, E-mail: cgmfmrd@rbi.org.in
िहन्दी आसान है, इसका प्रयोग बढ़ाइए3. Necessary amendments (Notification No. FEMA 388/2017-RB dated October 24,
2017) to Foreign Exchange Management (Foreign Exchange Derivatives Contracts)
Regulations, 2000 (Notification No. FEMA.25/RB-2000 dated May 3, 2000)
(Regulations) have been notified in the Official Gazette vide G.S.R.No.1324 (E) dated
October 24, 2017 a copy of which is given in the Annex II to this circular. These
regulations have been issued under clause (h) of sub-section (2) of Section 47 of
FEMA, 1999 (42 of 1999). The Master Direction on Risk Management & Interbank
dealings dated July 5, 2016, as amended from time to time, has been updated
accordingly.
4. The guidelines of this facility are given in Annex I to this circular and this facility
will be effective from January 01, 2018.
5. AD Category – I banks may bring the contents of this circular to the notice of their
constituents and customers.
6. The directions contained in this circular have been issued under 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
(T Rabi Sankar)
Chief General Manager[Annex I to A.P. (DIR Series) Circular No. 11 dated November 09, 2017]
Simplified Hedging Facility Guidelines
Users: Resident and non-resident entities, other than individuals.
Purpose: To hedge exchange rate risk on transactions, contracted or anticipated,
permissible under Foreign Exchange Management Act (FEMA), 19991.
Products: Any Over the Counter (OTC) derivative or Exchange Traded Currency
Derivative (ETCD) permitted under FEMA, 1999.
Cap on Outstanding Contracts: USD 30 million, or its equivalent, on a gross basis.
Designated Bank: Any Authorised Dealer Category-I (AD Cat-I) bank designated as
such by the user.
Operational Guidelines, Terms and Conditions
i. The user shall appoint an AD Cat-I bank as its “Designated Bank”. The
designated bank will assess the hedging requirement of the user and set a limit
up to the stipulated cap on the outstanding contracts.
ii. If hedging requirement of the user exceeds the limit in course of time, the
designated bank may re-assess and, at its discretion, extend the limit up to 150%
of the stipulated cap.
iii. Hedge contracts in OTC market can be booked with any AD Cat-I bank, provided
the underlying cash flow takes place with the same bank.
iv. Cost reduction structures can be booked by users provided that resident unlisted
companies can use such structures only if they have a minimum net worth of
Rs.200 crores
v. Users are not required to furnish any documentary evidence for establishing
underlying exposure under this facility. Users may, however, provide basic details
1 Rupee denominated bonds issued overseas may be hedged provided it is permitted under contracted exposure
hedging.of the underlying transaction in a standardised format2, only in the case of OTC
hedge contracts.
vi. Cancelled contracts may be freely rebooked with the same bank.
vii. In case of hedge contracts booked in OTC market, while losses will be recovered
from the user, net gains i.e. gains in excess of cumulative losses, if any, will be
transferred at the time of delivery of the underlying cash flow. In case of part
delivery, net gains will be transferred on a pro-rata basis.
viii. For hedge contracts on underlying capital account transactions, gains/losses may
be transferred to the user as and when they accrue if the underlying asset/liability
is already in existence.
ix. On full utilisation of the limit or in case of breach of limit, user shall not book new
contracts under this facility. In such a case, contracts booked earlier under this
facility will be allowed to continue till they expire or are closed. Any further
hedging requirements thereafter may be booked under other available hedging
facilities.
x. Users booking contracts under this facility shall not book contracts under any
other facility in OTC or ETCD market except as provided in para (ix).
xi. At the end of each financial year, the user will provide the designated bank with a
statement signed by the head of finance or the head of the entity, to the effect
that,
a. Hedge contracts booked in both OTC and ETCD market, under this
facility, are backed by underlying exchange rate exposures, either
contracted or anticipated.
b. The exposures underlying the hedge contracts booked under this facility
are not hedged under any other facility.
xii. On being appointed, the designated bank shall report the details of the users and
limits granted to the Trade Repository (TR). On a request by the TR, the
exchanges shall report all contracts booked by such users to the TR on a daily
basis.
2 Standardized format will be devised by Foreign Exchange Dealers Association of India (FEDAI) and will include
details like transaction type, i.e. current account (import, export) or capital account (ECB, FPI, FDI etc.), amount,
currency and tenor.xiii. The TR will compute user wise outstanding position (across OTC and ETCD
market) and provide this information to the designated bank for monitoring. If the
outstanding contracts of a user exceeds the limit (or the extended limit, if
applicable) the designated bank shall advise the user to stop booking new
contracts under this facility.
xiv. When user migrates to other available facilities, the designated bank shall report
this information to the TR. The TR shall update this information in its records and
notify the recognized stock exchanges to stop reporting data for the user
concerned.
xv. Banks shall have an internal policy regarding the time limit up to which a hedge
contract for a given underlying can be rolled-over or rebooked by the user.