No change in RBI policy approach on Exchange Traded Currency Derivatives (ETCD)

RBI today reiterated that the regulatory framework for ETCDs has remained consistent over the years and that there is no change in the RBI’s policy approach. The announcement was made as some concerns have been expressed about participation in the exchange traded currency derivatives (ETCD) market in the light of the Reserve Bank of India’s (RBI) A.P. (DIR Series) Circular No. 13 dated January 05, 2024.

The  Reserve Bank of India vide its circular dated June 20, 2014,  permitted users of ETCDs to take positions up to USD 10 million per exchange without providing documentary evidence to establish the underlying exposure but did not provide any exemption from the requirement of having the exposure. The limit of USD 10 million per exchange was subsequently amended and currently stands at a single limit of USD 100 million combined across all exchanges. The regulatory framework for participation in ETCDs involving the Indian rupee (INR) is guided by the provisions of the Foreign Exchange Management Act (FEMA), 1999 and regulations framed thereunder which mandate that currency derivative contracts involving the INR – both over-the-counter (OTC) and exchange-traded – are permitted only for hedging of exposure to foreign exchange rate risks. The regulatory framework has been reiterated in the amended FEMA (Foreign Exchange Derivative Contracts) Regulations, 2000 dated May 03, 2000 (Notification No. FEMA.25/RB-2000 dated May 03, 2000). The amendment states that a person may enter into an ETCD contract involving the INR only to hedge a contracted exposure.

“The framework governing the hedging has been made more comprehensive by consolidating the directions in respect of all types of transactions – over-the-counter (OTC) and exchange-traded – under a single Master Direction, based on public consultations, feedback received from market participants and experience gained by the regulator. The framework has also been refined to enhance operational efficiency and ease access to foreign exchange derivatives, especially for users with small exposures. This will also ensure that a broader set of customers with the necessary risk management expertise are given the flexibility to manage their exposures efficiently” said RBI.

The A.P. (DIR Series) Circular No. 13 dated January 05, 2024, sets out the Master Direction and reiterates the regulatory framework for participation in ETCDs involving the INR without any change. As hitherto, participants with a valid underlying contracted exposure can continue to enter into ETCDs involving the INR up to a limit of USD 100 million without having to produce documentary evidence of the underlying exposure. RBI stated that these comprehensive and consolidated Directions shall come into effect from April 05, 2024. However, in view of feedback received and recent developments, it has been decided that these Directions will now come into effect from Friday May 03, 2024, it said.