risk management and inter-bank dealings
A.P. (DIR Series) (2001-2002) Circular No. 19, dated 24-1-2002
1. Attention
of authorised dealers is invited to the Reserve Bank Notification No.
FEMA/25/2000-RB, dated May 3, 2000.
2. Directions
relating to forward exchange cover and other derivative products, Rupee
Accounts of non-resident banks and inter-bank dealings, are contained in the
enclosure. These directions supersede the existing instructions, namely :
i. Chapter 3 (Parts C & D and
Annexure II) of ECM,
ii. Chapter 5 (Parts A & B and
Annexure) of ECM,
iii. Instructions contained in A.D. (M.A.
Series) Circular No. 1 dated January 19, 2000.
3. Detailed
guidelines contained in Parts B and C of the enclosure are being issued as
required under Regulation 6 of the Reserve Bank Notification No. FEMA/5/2000-RB
dated May 3, 2000, which permits authorised dealers to keep deposits with his
branch, head office or correspondent outside India and also to accept deposit kept
by a branch or correspondent outside India of an authorised dealer and hold in
its books in India.
4. Authorised
dealers may bring the contents of this circular to the notice of their
constituents concerned.
5. 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).
Forward Exchange Contracts
A.1(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.
(ii) While
booking contracts for their constituents, authorised dealers should verify
suitable documentary evidence, irrespective of the underlying transaction being
a current account transaction 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.
A.2 Authorised
dealers may also allow importers and exporters to book forward contract 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.
A.3 A
forward contract cancelled with one authorised dealer can be rebooked 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 rebooking are done simultaneously on the maturity date of the
contract.
c. the
responsibility of ensuring that the original contract which has been cancelled
rests with the authorised dealer who undertakes rebooking of the contract.
Contracts other than Forward contracts
A.4(i) Authorised dealers in India may enter into contracts other than
forward contracts with residents in India in accordance with the provisions
contained in paragraph 2 of Schedule I to the 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 institutionalize the arrangements for a quarterly review of
operations and annual audit of transactions to verify compliance with the
regulations. The quarterly review reports and the annual audit reports should
be obtained from the concerned corporate by the authorised dealers.
(iii) Authorised
dealers may forward a report containing full details of the transactions
undertaken by residents in terms of Paragraph 2 of Schedule 1 to the Regional
Office of the Reserve Bank within whose jurisdiction it is functioning, within
a week of its conclusion.
(iv) 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 the Reserve Bank of India.
Note : Authorised dealers should not allow the swap route to
become a surrogate for forward contracts for those who do not qualify for
forward cover.
Other Derivatives - Foreign Currency Options
A.5 (i) Authorised dealers in India may write cross currency options in
accordance with the provisions contained in paragraphs 2 & 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, 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
A.6 (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 the 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) Authorised
Dealers have to submit a monthly statement to RBI giving the details of the
hedging activities undertaken by their clients. They also have to certify that
all hedging positions were supported by underlying physical exposures.
Facilities for Foreign Institutional Investors (FIIs)
A.7 (i) Designated branches of authorised dealers maintaining accounts of
FIIs provide forward cover to such customers subject to the conditions set down
in paragraph 1 of Schedule II to the Reserve Bank Notification No. FEMA
25/RB-2000 dated 3rd May, 2000.
(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)
A.8 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.
Management of Bank’s Assets-Liabilities
A.9 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.
Hedging of Gold Prices
A.10 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.
General
(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 on inward remittance in foreign currency.
(iii) In
the case of individual payments of USD 10,000 or more, the purpose of
remittance as given by the recipient should be reported in the statement
annexed to R Return.
(iv) Authorised
dealers may issue encashment certificates in accordance with the procedures
laid down.
Rupee Accounts of Non-Resident Banks
(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.
B.3 All
debits/credits to the accounts of non-resident banks should be reported in form
A3. Funding of Accounts of Non-resident Banks
B.4(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.
Transfers from other Accounts
B.5 Transfer of funds
between the accounts of the same bank or different banks is freely permitted.
Conversion of Rupee into Foreign Currencies
B.6 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.
Responsibilities of Paying and Receiving Banks
B.7 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. The receiving banker after ensuring that the funds are eligible for credit
should submit form A1/A2 under cover of the R Return.
Refund of Rupee Remittances
B.8 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.
Overdrafts/Loans to Overseas Branches/Correspondents
B.9(i) Banks may permit their overseas branches/correspondents temporary
overdrawals not exceeding Rs. 500 lakhs in the 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.
Rupee Accounts of Exchange Houses
B.10 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 up to Rs.
2,00,000 per transaction.
General
The
Board of Directors of authorised dealers should frame an appropriate policy and
fix suitable limits for various treasury functions.
Position and Gaps
The
overnight open exchange position (vide Annexure I) and the aggregate gap
limits are required to be approved by the Reserve Bank.
Inter-bank transactions
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 :
(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 subject to Reserve Bank approval.
Applications in this regard should be made to the Chief General Manager,
Exchange Control Department (Forex Markets Division), Reserve Bank of India,
Central Office, Mumbai - 400001.
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 inter-bank market but all such
transactions should be reported to Reserve Bank in R Returns.
Foreign currency accounts
(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
may must invest up to 15% of their unimpaired Tier-I capital or US $ 10 million
whichever is higher, and the entire amount representing undeployed foreign
currency deposit liabilities 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 as A-1+/AAA by Standard and Poor or P-1/Aaa by Moody’s or
F1+/AAA by Fitch IBCA. For the purpose of investments in debt instruments other
than 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 instruments whose life to maturity does not exceed one year
as on the date of purchase.
(iii)
Foreign currency funds representing
deposit liabilities 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).
(iv) 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.
Loans/Overdrafts
(i) Banks
may avail of loans/overdrafts from their overseas branches and correspondents
up to 15% of their unimpaired Tier-I capital or US $ 10 million or its
equivalent, whichever is higher. The funds may be used for purposes other than
lending in foreign currencies and repaid without reference to Reserve Bank. The
aforesaid limit applies to the aggregate amount availed 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 - 400001 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
Forex Markets Division, in the Central Office of Reserve Bank 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.
Reports to 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.
(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.
Annexure I
(See
paragraph C.2)
Guidelines for
Foreign Exchange Exposure Limits
of Authorised Dealers
Coverage
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
Capital refers to Tier-I
capital as per instructions issued by Reserve Bank of India (Department of
Banking Operations and Development).
Calculation of the
Net Open Position in a Single Currency
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
dealers 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). For the present this is relevant for foreign branches of
Indian banks.
Calculation of the
Overall Net Open Position
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. Convert the net position into rupees at
the FEDAI indicative spot rates for the day.
iii. Arrive at the sum of all the net short
positions.
iv. Arrive at the sum of all the net long
positions.
Overall net foreign
exchange position is the higher of (iii) and (iv). The overall
net foreign exchange position arrived at as above must be kept within the limit
approved by Reserve Bank.
Capital
Requirement
As prescribed by Reserve Bank from time to time.