Exchange Traded Currency Derivatives (ETCD) market: Revised guidelines

Risk Management and Inter-bank Dealings: Revised Guidelines relating to the Exchange Traded Currency Derivatives (ETCD) market

At present, domestic participants are allowed to take a long (bought) as well as short (sold) position upto USD 10 million per exchange. As a measure of further liberalisation, RBI amended the provision in terms of its circular No. 90 dated March 31, 2015 that the limit (long as well as short) in USD-INR pair has been increased upto USD 15 million per exchange. Further, domestic participants shall be allowed to take long as well as short positions in EUR-INR, GBP-INR and JPY-INR pairs, all put together, upto USD 5 million equivalent per exchange. As per the circular, the exchanges for the purpose of monitoring the positions may prescribe fixed limits for the contracts in currencies other than USD so that these limits are within the equivalent of USD 5 million.

Importers hedging contract:

The eligible limit for Importers hedging contracted exposure has also been increased from existing limit of 50% up to 100% from existing 50% of the eligible limit. The banking regulator’s communiqué says that the enhancement of limit is with a view to bringing at par both exporters and importers in the ETCD market. For participants who are exporters or importers of goods and services, the eligible limit up to which they can take appropriate hedging positions in ETCDs will be determined as higher of the (I) average of the last three years’ export or import turnover, or (II) previous year’s export or import turnover

Changes in documentation requirements (for both Importers and Exporters)

All participants in the ETCD market, except those covered by paragraph (2)(b)(iv) of A.P. (DIR Series) Circular No. 147 dated June 20, 2014,, will be required to submit to the concerned trading member of the exchange a half-yearly certificate from their statutory auditors as on March 31st and September 30th, within fifteen days from the said dates, to the effect that during the preceding six months, the derivative contracts entered into by the participant in the OTC and the ETCD markets put together did not exceed the actual exposure. It has now been decided by the regulator that, a signed undertaking to the same effect from the Chief Financial Officer (CFO) or the senior most functionary responsible for company’s finance and accounts and the Company Secretary (CS) may be produced instead of the statutory auditor’s certificate,. In the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) shall co-sign the undertaking along with the CFO.

All other operational guidelines, terms and conditions including the requirement of certificate(s) from the Statutory Auditor regarding the eligible limit up to which domestic participants can take appropriate hedging positions in the ETCD market and the necessary undertaking from the CFO or senior most functionary responsible for company’s finance and accounts as indicated in para (2)(b)(ii) of the above circular remain unchanged.

What is a currency derivative?

Revised guidelines on exchange-traded currency deliveries

What is a forward contract?

Forward contracts explained

Difference between a forward contract and futures

What are the cash rate, tom rate, spot rate, and forward rate?

How does a bank charges on early delivery or cancellation of forward contracts?

Revision of position long or short in currency derivatives

Surendra Naik