Permissible activities of IFSC Banking Units (IBUs)

The Reserve Bank of India on Tuesday (21/01/2020) issued directions relating to IFSC Banking Units (IBUs)  governed under  ‘Currency Futures in International Financial Services Centre (Reserve Bank) Directions, 2020’ which shall come into force with effect from the date of its publication.

IFSC is an abbreviation for International Financial Services Centres and IFSC Banking Units are called IBUs.  Reserve Bank has permitted IBUs to participate in exchange-traded currency derivatives on Rupee (with settlement in foreign currency) listed on stock exchanges set up at IFSCs. “Banks shall ensure that their IBUs have the necessary expertise to price, value and compute the capital charge and manage the risks associated with the products/transactions intended to be offered and should also obtain their Board’s approval for undertaking such transactions” Central Bank notification said.

Permission to a setting of IFSC Banking Units is subject to –

1. Currency futures contracts are permitted in any currency pair involving the Rupee or otherwise.
2.  A person resident in India, as defined in clause (v) of section 2 of Foreign Exchange Management Act, 1999 (Act 42 of 1999), unless specifically permitted by the Reserve Bank, shall not be eligible to undertake currency futures contracts.
3. A person resident outside India, as defined in section 2(w) of Foreign Exchange Management Act, 1999 (Act 42 of 1999), shall be eligible to undertake currency futures contracts.

Settlement of currency futures:

In terms of the above notification of RBI, all currency futures contracts shall be settled in a currency other than the Indian Rupee. Nevertheless, the settlement price for currency futures contracts involving Rupee shall be the FBIL Reference rate, where available, on the last trading day of the contract.  In case of currency futures contracts involving Rupee where FBIL reference rates are not available and for other currency pairs, the mechanism for arriving at the settlement price shall be decided by the recognized stock exchange in consultation with SEBI.    The size, maturity and other specifications of the currency futures contracts shall be decided by the recognised stock exchange in consultation with SEBI, the notification said.  “The position limits for various classes of participants in the currency futures market shall be subject to the guidelines issued by SEBI,” the notification said.

“The Reserve Bank may from time to time modify the eligibility criteria for the participants, modify participant-wise position limits, prescribe margins and / or impose specific margins for identified participants, fix or modify any other prudential limits, or take such other actions as deemed necessary in public interest, in the interest of financial stability and orderly development and maintenance of foreign exchange market in India,” the communication said