Risk Management and Inter-Bank Dealings
A.P. (DIR Series) (2002-2003) Circular No. 92, dated 4-4-2003
Attention
of authorised dealers is invited to A.P. (DIR Series) Circular No. 19 dated
January 24, 2002 and various amendments issued on the captioned subject from
time to time.
2. Instructions
pertaining to forward exchange cover, other derivative products, Rupee accounts
of Non-resident banks and inter-bank dealings etc., have been consolidated as
indicated in the enclosures to this circular. These instructions supersede the
instructions contained in the circulars mentioned above.
3. Authorised
Dealers may bring the contents of this circular to the notice of their
constituents concerned.
4. The
directions contained in this circular have been issued under Section 10(4) and
Section 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999).
RISK MANAGEMENT
(i) Authorised
dealers may enter into forward contracts with residents in accordance with the
provisions contained in paragraph 1 of Schedule I to Reserve Bank Notification
No. FEMA 25/RB-2000 dated 3rd May 2000 and amendments thereto.
(ii) While
booking contracts for their constituents, authorised dealers should verify
suitable documentary evidence, irrespective of the underlying transaction being
a current account or a capital account transaction, to ensure that an exposure
exists, to the extent of the amount of cover sought. Full particulars of contract
should be marked on such documents under proper authentication and copies
thereof retained for verification.
Authorised
dealers may also allow importers and exporters to book forward contracts on the
basis of a declaration of an exposure and based on past performance subject to
the conditions prescribed by Reserve Bank of India in this regard. [Ref:
EC.CO.FMD/453/02.03.75/2001-02 dated December 1, 2001 and AP (DIR Series)
Circular No. 63 dated December 21, 2002].
A
forward contract once cancelled may be re-booked subject to conditions
prescribed by the Reserve Bank from time to time [Ref: EC.CO.
FMD.790/02.03.75/2001-02 dated March 26, 2002 and AP (DIR Series) Circular No.
63 dated December 21, 2002].
A
forward contract cancelled with one authorised dealer can be re-booked with
another authorised dealer subject to the following conditions:
a. the
switch is warranted by competitive rates on offer, termination of banking
relationship with the authorised dealer with whom the contract was originally
booked, etc.
b. the
cancellation and re-booking are done simultaneously on the maturity date of the
contract,
c. the
responsibility of ensuring that the original contract has been cancelled rests
with the authorised dealer who undertakes re-booking of the contract.
Contracts other than Forward Contracts
(i) Authorised
dealers in India may enter into contracts, other than forward contracts with
residents in India in accordance with the provisions contained in paragraphs 2
and 3 of Schedule I to Reserve Bank Notification No. FEMA 25/RB-2000 dated 3rd
May 2000.
(ii) Authorised
dealers should ensure that the Board of Directors of the corporate has drawn up
a risk management policy, laid down clear guidelines for concluding the
transactions and institutionalised the arrangements for a periodical review of
operations and annual audit of transactions to verify compliance with the
regulations. The periodical review reports and annual audit reports should be
obtained from the concerned Corporate by the authorised dealers.
(iii) Foreign
currency - rupee swaps between Corporates who run long-term foreign currency or
rupee exposures may be arranged by authorised dealers subject to the conditions
prescribed by Reserve Bank of India. [Ref: AP (DIR Series) Circular No. 63 dated
December 21, 2002]
Note :
i. Authorised dealers should not offer
leveraged swap structures to clients.
ii. Authorised
dealers should not allow the swap route to become a surrogate for forward
contracts for those who do not qualify for forward cover.
(i) Authorised
dealers in India may write cross currency options in accordance with the
provisions contained in paragraphs 2 and 3 of Schedule I to the Reserve Bank
Notification No. FEMA 25/RB-2000 dated 3rd May 2000.
(ii) Option
should be written on a fully covered back-to-back basis. The cover transaction
may be undertaken with a bank outside India, an off-shore banking unit situated
in a Special Economic Zone or an internationally recognized option exchange or
another authorised dealer in India.
(iii) Authorised
dealers desirous of writing options, should obtain one time approval, before
undertaking the business, from the Chief General Manager, Exchange Control
Department, (Forex Markets Division), Reserve Bank of India, Central Office,
Mumbai, 400 001.
Hedging of commodity price risk in the International Commodity Markets
(i) Residents
in India, engaged in import and export trade, may hedge the price risk of
commodities in the international commodity exchanges/markets. Applications for
commodity hedging may be forwarded to Reserve Bank through the International
Banking Division of an authorised dealer giving the details laid down in
Schedule III to the Reserve Bank Notification No. FEMA 25/RB-2000 dated 3rd May
2000. A one-time approval will be given by Reserve Bank along with the
guidelines for undertaking this activity.
(ii) General
permission has been granted to entities in ‘Special Economic Zones’ to
undertake hedging transactions in the overseas commodity exchanges/markets to
hedge their commodity prices on export/import, subject to the condition that
such contract is entered into on a stand-alone basis.
Note: The term
“stand-alone” means the unit in SEZ is completely isolated from financial
contacts with its parent or subsidiary in the mainland or within the SEZs as
far as its import/export transactions are concerned. [Ref: A.P. (DIR Series)
Circular No. 44 dated November 12, 2002].
Facilities for Foreign Institutional Investors (FIIs)
(i) Designated
branches of authorised dealers maintaining accounts of FIIs may provide forward
cover to such customers subject to the conditions laid down in paragraph 1 of
Schedule II to the Reserve Bank Notification No. FEMA 25/RB-2000 dated 3rd May
2000, as amended from time to time. At present, FIIs are allowed to hedge the
market value of their entire investment in equity as on a particular date. If a
hedge becomes naked in part or full owing to shrinking of the portfolio, for
reasons other than sale of securities, the hedge may be allowed to continue to
the original maturity, if so desired.
(ii) The
eligibility for cover may be determined on the basis of the declaration of the
FII. A review may be undertaken on the basis of market price movements, fresh
inflows, amounts repatriated and other relevant parameters to ensure that the
forward cover outstanding is supported by underlying exposure.
(iii) A
monthly statement should be furnished to the Chief General Manager, Reserve
Bank of India, Exchange Control Department (Forex Markets Division), Central
Office, Mumbai-400 001 before the 10th of the succeeding month indicating the
name of the FII/fund, the eligible amount of cover and the actual cover taken.
Facilities for Non-resident Indians (NRIs) And Overseas Corporate Bodies (OCBs)
Authorised
dealers may enter into forward contracts with NRIs/OCBs as per the guidelines
set down in paragraph 2 of Schedule II to the Reserve Bank Notification No.
FEMA 25/RB-2000 dated 3rd May 2000.
Authorised
Dealers may enter into forward contracts with residents outside India to hedge
the investments made in India since January 1,1993, subject to verification of
the exposure in India.
Facilities for
Authorised Dealers
Authorised
dealers may use the following instruments to hedge their assets-liability
portfolio :
(i) Interest rate swaps,
(ii) Currency swaps, and
(iii) Forward rate agreements.
Authorised
dealers may also purchase call or put options to hedge their cross currency
proprietary trading positions.
The
use of these instruments is subject to the following conditions:
(a) An appropriate policy in this regard
is approved by their Top Management.
(b) The value and maturity of the hedge
should not exceed that of the underlying.
(c) No
‘stand-alone’ transactions can be initiated. If a hedge becomes naked in part
or full owing to shrinking of the portfolio, it may be allowed to continue till
the original maturity and should be marked to market at regular intervals.
(d) The
net cash flows arising out of these transactions are booked as income and
expenditure and reckoned as exchange position wherever applicable.
(i) Banks
authorised by Reserve Bank to operate the Gold Deposit Scheme may use
exchange-traded and over-the-counter hedging products available overseas to
manage the price risk. However, while using products involving options, it may
be ensured that there is no net receipt of premium, either direct or implied.
Banks, which are allowed to enter into forward gold contracts in India in terms
of the guidelines issued by the Department of Banking Operations and
Development (including the positions arising out of inter-bank gold deals) are
also allowed to cover their price risk by hedging abroad in the manner
indicated above.
(ii) Authorised
banks are permitted to enter into forward contracts with their constituents
(exporters of gold products, jewellery manufacturers, trading houses, etc.) in respect
of the underlying sale, purchase and loan transactions in gold with them
subject to the conditions specified by Reserve Bank.
Foreign
banks may hedge the entire Tier I Capital held by them in Indian books subject
to conditions laid down by Reserve Bank.
{Ref:
EC.CO.FMD/6/02.03.75/2002-03 dated November 20, 2002 and Ref: AP (DIR Series)
Circular No. 63 dated December 21, 2002}
Accounts of Non-resident Banks
(i) Credit
to the account of a non-resident bank is a permitted method of payment to
non-residents and is, therefore, subject to the regulations applicable to
transfers in foreign currency.
(ii) Debit
to the account of a non-resident bank is in effect an inward remittance in
foreign currency.
(i) Banks
may open/close rupee accounts (non-interest bearing) in the names of their
overseas branches or correspondents without prior reference to Reserve Bank.
Opening of rupee accounts in the names of branches of Pakistani banks operating
outside Pakistan requires specific approval of Reserve Bank.
(ii) The
Head/Principal Office of each bank should furnish an up-to-date list (in
triplicate) of all its offices/branches, which are maintaining rupee accounts
of non-resident banks as at the end of December every year giving their code
numbers allotted by Reserve Bank. The list should be submitted before 15th
January of the following year to the Central Office of Reserve Bank (Central
Statistical Division). The offices/branches should be classified according to
area of jurisdiction of Reserve Bank Offices within which they are situated.
(i) Banks
may freely purchase foreign currency from their overseas
correspondents/branches at on-going market rates to lay down funds in their
accounts for meeting their bona fide needs in India.
(ii) Transactions
in the accounts should be closely monitored to ensure that overseas banks do
not take a speculative view on the rupee. Any such instances should be notified
to the Reserve Bank.
Note :
A. Forward purchase or sale of foreign
currencies against rupees for funding is prohibited.
B. Offer
of two-way quotes to non-resident banks is also prohibited.
Transfer
of funds between the accounts of the same bank or different banks is freely
permitted.
Balances
held in rupee accounts of non-resident banks may be freely converted into
foreign currency. All such transactions should be reported in Form A2 and the
corresponding debit to the account should be in form A3 under the relevant R
Returns.
In
the case of credit to accounts the paying banker should ensure that all Control
requirements are met and are correctly furnished in form A1/A2 as the case may
be.
Requests
for cancellation or refund of inward remittances may be complied with without
reference to Reserve Bank after satisfying themselves that the refunds are not
being made in cover of transactions of compensatory nature.
(i) Banks
may permit their overseas branches/correspondents temporary overdrawals not
exceeding Rs. 500 lakhs in aggregate, for meeting normal business
requirements. This limit applies to the amount outstanding against all overseas
branches and correspondents in the books of all the branches of the bank in
India. This facility should not be used to postpone funding of accounts. If overdrafts
in excess of the above limit are not adjusted within five days a report should
be submitted to the Central Office of Reserve Bank (Forex Markets Division)
within 15 days from the close of the month, stating the reasons therefor. Such
a report is not necessary if arrangements exist for value dating.
(ii) Banks
wishing to extend any other credit facility in excess of (i) above to overseas
banks should seek prior approval from the Chief General Manager, Reserve Bank
of India, Exchange Control Department (Forex Markets Division) Central Office,
Mumbai.
Opening
of rupee accounts in the names of exchange houses for facilitating private
remittances into India requires approval of Reserve Bank. Remittances through
exchange houses for financing trade transactions are permitted upto Rs.
2,00,000 per transaction.
Inter-Bank Foreign Exchange Dealings
The
Board of Directors of authorised dealers should frame an appropriate policy and
fix suitable limits for various Treasury functions.
The
overnight open exchange position (vide Annexure I) and the aggregate gap limits
are required to be approved by Reserve Bank.
Subject
to compliance with the provisions of paragraphs C.1 and C.2, authorised dealers
may freely undertake foreign exchange transactions as under:
(a) With authorised dealers in India:
(i) Buying/Selling/Swapping
foreign currency against rupees or another foreign currency
(ii) Placing/Accepting
deposits and Borrowing/Lending in foreign currency.
(b) With banks overseas and Off-shore
Banking Units in Special Economic Zones
(i) Buying/Selling/Swapping
foreign currency against another foreign currency to cover client transactions
or for adjustment of own position,
(ii) Initiating trading positions in the
overseas markets.
Note A: Funding of accounts of Non-resident banks
- refer to paragraph B.4
B: Form A2
need not be completed for sales in the interbank market, but all such
transactions shall be reported to Reserve Bank in R Returns
(i) Inflows
into foreign currency accounts arise primarily from client-related
transactions, swap deals, deposits, borrowings, etc. Banks may maintain
balances in foreign currencies up to the levels approved by the Top Management.
They are free to manage the surplus in these accounts through overnight
placement and investments with their overseas branches/correspondents subject
to adherence to the gap limits approved by Reserve Bank.
(ii) Banks
are free to undertake investments in overseas markets subject to the limits
approved by their Board of Directors. Such investments may be made in overseas
money market instruments and/or debt instruments issued by a foreign state with
a residual maturity of less than one year and rated at least as AA (-) by
Standard & Poor/FITCH IBCA or Aa3 by Moody’s. For the purpose of
investments in debt instruments other than the money market instruments of any
foreign state, bank’s Board may lay down country ratings and country-wise
limits separately wherever necessary.
Note: For the
purpose of this clause, ‘money market instrument’ would mean any debt
instrument whose life to maturity does not exceed one year as on the date of
purchase.
(iii) Banks
may also invest the undeployed FCNR (B) funds in overseas markets in long-term
fixed income securities subject to the conditions laid down by Reserve Bank of
India. {Ref: AP (DIR Series) Circular No. 40 dated April 29, 2002.}
(iv) Foreign
currency funds representing surpluses in the nostro accounts may be utilised
for:
(a) making
loans to resident constituents for meeting their foreign exchange requirements
or for the rupee working capital/capital expenditure needs subject to the
prudential/interest-rate norms, credit discipline and credit monitoring
guidelines in force.
(b) extending
credit facilities to Indian wholly owned subsidiaries/joint ventures abroad in
which at least 51% equity is held by a resident company, subject to the
guidelines issued by Reserve Bank (Department of Banking Operations &
Development).
(v) Banks
may write off/transfer to unclaimed balances account, unreconciled debit/credit
entries as per instructions issued by Department of Banking Operations and
Development, from time to time.
(i) Banks
may avail of loans/overdrafts from their Head Office, overseas branches,
correspondents up to 25% of their unimpaired Tier-I capital or US $ 10 million
or its equivalent, whichever is higher. The funds so raised may be used for
purposes other than lending in foreign currency to constituents in India and
repaid without reference to the Reserve Bank. As an exception to this rule
authorised dealers are permitted to use borrowed funds as also foreign currency
funds received through swaps for granting foreign currency loans in terms of
IECD Circular No. 12/04.02.02/2002-03 dated January 31, 2003. The aforesaid
limit applies to the aggregate amount availed of by all the offices and
branches in India from all their branches/correspondents abroad. If drawals in
excess of the above limit are not adjusted within five days, a report should be
submitted to the Chief General Manager, Reserve Bank of India Exchange Control
Department, Forex Markets Division, Amar Building, Fort, Mumbai 400 001
within 15 days from the close of the month in which the limit was exceeded.
Such a report is not necessary if arrangements exist for value dating.
(ii) Banks
may avail of loans in excess of the limits prescribed in sub-paragraph (i)
above solely for replenishing their rupee resources in India without prior
approval of Reserve Bank. Such rupee funds may be used only for financing the
banks’ normal business operations and should not be deployed in the call money
etc. markets. A report on each borrowing should be immediately forwarded to the
Chief General Manager, Reserve Bank of India Exchange Control Department, Forex
Markets Division, Amar Building, Fort, Mumbai 400 001 whose prior permission
will be required for repayment of such loans. Such permission will be given
only if the bank has no borrowings outstanding either from Reserve Bank or
other bank/financial institution in India and is clear of all money market
borrowings for a period of at least four weeks before the repayment.
(iii) Interest
on loans/overdrafts may be remitted (net of taxes) without the prior approval
of Reserve Bank.
(i) The
Head/Principal Office of each authorised dealer should submit to the Chief
General Manager, Exchange Control Department (Forex Markets Division), Reserve
Bank of India, Central Office, Mumbai 400 001 daily statements of foreign
exchange turnover in Form FTD and Gaps position and cash balances in Form GPB
as per Annexure II. These statements should be transmitted online through wide
area network (WAN).
(ii) The
Head/Principal Office of each authorised dealer should submit a statement in
duplicate in form BAL giving details of their holdings of all foreign
currencies on fortnightly basis so as to reach the Regional Office of Reserve
Bank under whose jurisdiction the Head/Principal Office is situated within
seven calendar days from the close of the reporting period to which it relates.
(iii) The
Head/Principal Office of each authorised dealer should forward a statement of
Nostro/Vostro Account balances on a monthly basis in the format given in
Annexure III to the Director, Division of International Finance, Department of
Economic Analysis and Policy, Reserve Bank of India, Central Office Building,
8th Floor, Fort, Mumbai-400 001. The data may also be transmitted by fax or
e-mail at the numbers/addresses given in the format.
(iv) Authorised
dealers may consolidate the data on cross currency derivatives transactions
undertaken by residents in terms of Paragraphs 2 and 3 of Schedule I to the
Notification and submit half-yearly reports to the Chief General Manager,
Exchange Control Department, (Forex Markets Division), Reserve Bank of India,
Central Office, Mumbai-400 001 as per the format indicated in the Annexure IV.
(v) Authorised
dealers may forward details of exposures in foreign exchange as on 1st April
every year as per the format appended to AP (DIR Series) Circular No. 63 dated
December 21, 2002 to the Chief General Manager, Exchange Control Department,
(Forex Markets Division), Reserve Bank of India, Central Office, Mumbai, 400
001.
ANNEXURE I
[See
paragraph C.2]
Guidelines
for Foreign Exchange Exposure Limits of Authorised Dealers
For banks incorporated
in India, the exposure limits fixed by the Management should be the aggregate
for all branches including their overseas branches. For foreign banks, the
limits will cover only their branches in India.
Capital refers to Tier I
capital as per instructions issued by Reserve Bank of India (Department of
Banking Operations and Development).
The open position must
first be measured separately for each foreign currency. The open position in a
currency is the sum of (a) the net spot position, (b) the net forward position
and (c) the net options position.
(a) Net Spot
Position
The net spot position is the difference between foreign
currency assets and the liabilities in the balance sheet. This should include
all accrued income/expenses.
(b) Net
Forward Position
This represents the net of all amounts to be received less
all amounts to be paid in the future as a result of foreign exchange
transactions which have been concluded. These transactions, which are recorded
as off-balance sheet items in the bank’s books, would include:
(i) spot transactions which are not yet
settled;
(ii) forward transactions;
(iii) guarantees and similar commitments denominated in foreign
currencies which are certain to be called;
(iv) net
of amounts to be received/paid in respect of currency futures, and the
principal on currency futures/swaps.
(c) Options Position
The options position is
the “delta-equivalent” spot currency position as reflected in the authorised
dealer’s options risk management system, and includes any delta hedges in place
which have not already been included under 3(a) or 3(b) (i) and (ii).
This involves
measurement of risks inherent in a bank’s mix of long and short position in
different currencies. It has been decided to adopt the “shorthand method” which
is accepted internationally for arriving at the overall net open position.
Banks may, therefore, calculate the overall net open position as follows:
(i) Calculate the net open position in each currency
(paragraph 3 above).
(ii) Calculate the net open position in gold.
(iii) Convert
the net position in various currencies and gold into rupees in terms of
existing RBI/FEDAI Guidelines.
(iv) Arrive at the sum of all the net short positions.
(v) Arrive at the sum of all the net long positions.
Overall net foreign
exchange position is the higher of (iv) or (v). The overall net foreign
exchange position arrived at as above must be kept within the limit approved by
Reserve Bank.
As prescribed by Reserve
Bank from time to time.