RBI HEDGING REGULATIONS for OTC Hedging

Summary Of
RBI HEDGING REGULATIONS for OTC Hedging
Last updated on February 8, 2014. Includes Notifications up to February 4, 2014.
OVERALL FRAMEWORK OF OVER-THE-COUNTER HEDGING
PARTICULARS
HEDGE TO BE
TAKEN WITH
CONTRACTED
EXPOSURE
AD Category – I
Banks
PAST
PERFORMANCE
FACILITY
SPECIAL
DISPENSATION
- SMEs
SPECIAL
DISPENSATION –
INDIVIDUALS
AD Category – I
Banks
AD Category-1
Banks (with
whom they have
credit facilities)
AD Category-1
Banks (with the
Bank in which Indv.
has banking
relationship)
SMEs
Individuals
Direct & Indirect
exposures
Actual or
anticipated
remittances
Depends on
credit facility
provided by the
Bank
USD 1,00,000
Upto 1 year
Upto 1 year
Not needed
Not needed
Quarterly
Quarterly
Importers &
Exporters
WHO CAN HEDGE
WHAT KIND OF
EXPOSURE
Residents in India
(For Exporters O/s
Bill should be < 10%
of turnover)
All types of
exposure that is
under a contract
100% Exposure of
the contract
HEDGING
QUANTITY LIMIT
TENOR OF HEDGE
PRODUCTION OF
DOCUMENT OF
UNDERLYING
EXPOSURE
CERTIFICATE
FROM
STATUTORY
AUDITOR
See chart and
tables in XLS
file
Trades in
merchandise goods
& services
Higher of:
a) Avg. of 3 yr
turnover
b) Last yr turnover
[100% of above for
Exporters & 25% for
Importers]
See chart and
tables in XLS file
Maturity of
Hedge < Balance
Maturity of
Exposure
Less than the
maturity of
underlying
exposure to be
produced*
At the time of
booking hedge
Before maturity/
cancellation of
hedge
See “Certain
Specific
Conditions” for
details
Annual
See “Certain
Specific
Conditions” for
details
Quarterly
Summary Of
RBI HEDGING REGULATIONS for OTC Hedging
CANCELLATION/ REBOOKING STIPULATIONS + OTHER FACILITIES:
PRODUCTS
FORWARD
FOREIGN
EXCHANGE
CONTRACTS
CONTRACTED
EXPOSURE
PAST
PERFORMANCE
FACILITY
100% Cancellation,
Rollover, Rebooking
allowed.
Fully deliverable. If
Cancelled, No
Rollover, No
Rebooking
See chart and
tables in XLS file
See chart and
tables in XLS file
SPECIAL
DISPENSATION
– SMEs
SPECIAL
DISPENSATION
– INDIVIDUALS
Cancellation,
Rollover,
Rebooking
allowed
Deliverable.
Under special
circumstances
cancellation and
rebooking
allowed.
Any currency can be chosen to hedge provided the Board approves of the same.
CROSS
CURRENCY
OPTIONS (NOT
INVOLVING INR)
FOREIGN
CURRENCY – INR
OPTIONS
FOREIGN
CURRENCY – INR
SWAPS
COST
REDUCTION
STRUCTURES
(Cross-currency
option &
Foreign
currency INR
option)
HEDGING OF
BORROWINGS IN
FOREIGN
EXCHANGE
Buy Plain Vanilla
Call or Put Options.
Buy Plain Vanilla
Call or Put Options
100% Cancellation,
Rollover, Rebooking
allowed.
If Cancelled, No
Rollover, No
Rebooking.
Buy Plain Vanilla
Call or Put Options
Buy Plain Vanilla
Call or Put Options
Delivery on spot
basis or Net Cash
settlement in INR
on spot basis as per
contract
If Cancelled, No
Rebooking
Listed Companies
[Cos. with Net
Worth > 200 Cr.]
Plain Vanilla
Options w/o receipt
of premium
Interest rate risk &
Currency risk on
loan exposures
(Cancellation &
Rebooking allowed
where INR is not
involved)
No
No
Delivery on spot
basis or Net Cash
settlement in INR
on spot basis as
per contract
No
No
No
No
No
No
No
No
No
Corporates [Cos.
with Net Worth >
200 Cr. & Annual
turnover > 1000
Cr.]
Plain Vanilla
Options w/o receipt
of premium)
No
Summary Of
RBI HEDGING REGULATIONS for OTC Hedging
GENERAL
TERMS &
CONDITIONS:
CERTAIN
SPECIFIC
CONDITIONS:

Exposure, whether capital or current, should be genuine.

Notional amount of derivative contract should not exceed actual underlying
exposure. Similarly, the tenor of derivative contract should not exceed tenor of
underlying exposure.

Declaration to be given to bank that exposure is no hedged with another bank.

Corporate should provide annual certificate to Bank that derivative transactions
are authorized and that the Board is aware of the same.

Derived foreign exchange exposures are not permitted to be hedged.

Other than for forwards, the term sheet should contain:
a) purpose of transaction,
b) spot rate at the time of transaction &
c) Quantified maximum loss/ worst downside in various scenarios.

Forward contracts booked with one Bank can be cancelled and rebooked with
another Bank provided such switch is warranted by better rates offered by the
other Bank and the cancellation and rebooking are done simultaneously on the
maturity date of contract.

Contracted Exposure:
a. 15 days period is allowed for submission of underlying documents from the
date of booking. If this facility is misused thrice in a FY, then this facility will
be withdrawn.
b. An undertaking has to be given to the Bank initially.
c. Provided Maturity of Hedge < Maturity of Underlying exposure, any currency
for any tenor can be chosen for hedging.

Past Performance Facility:
a. An undertaking has to be given by customer that supporting documentary
evidence would be produced before maturity of contracts.
b. Any contract booked without documentary evidence shall be marked off
against this limit.
c. Past performance limits once utilized cannot be reinstated.
d. Cover > 50% of limit needs CA certificate stating all guidelines have been
adhered to, certified of last 3 export/ import turnover details.
e. Higher limits can be sanctioned on application to RBI which shall be on
deliverable basis.

Special Dispensation – SMEs:
Must produce a declaration to bank regarding forwards booked with other banks.

Hedging of Borrowings in Foreign Exchange:
Products that can be used without involving INR are: Interest rate swap, Cross
currency swap, Coupon swap, Cross currency option, Interest rate cap or collar
(purchases), Forward rate agreement (FRA).
Summary Of
RBI HEDGING REGULATIONS for OTC Hedging
PRODUCTS TO BE USED FOR OTHER PURPOSES
PURPOSE
FORWARD
FOREIGN
EXCHANGE
CONRACTS
OVERSEAS
DIRECT
INVESTMENT
(ODI)
Yes
(100%
Cancellation,
Rollover
allowed)
ECONOMIC
EXPOSURE OF
IMPORTERS IN
RESPECT OF
CUSTOMS
DUTY ON
IMPORTS
Yes
FOREIGN
CURRENCY
LOANS/ BONDS
Global
Depository
Receipts &
American
Depository
Receipts
Balance in
EEFC a/c sold
forward
NON-INR
FORWARD
CONTRACTS
Exposure due
to submission
of tender bid
in Foreign
Exchange
CROSS
CURRENCY
OPTION (W/O
INR)
FOREIGN
CURRENCY –
INR OPTIONS
After final
approval of RBI
and allotment
of Loan
Registration
Number
Yes.
After issue
price has been
finalized
Earmarked for
delivery.
Cannot be
cancelled. But
can be rolled
over on
maturity.
Can be
rebooked on
cancellation
provided
exposure
information is
submitted.
No
COST
REDUCTION
STRUCTURES
No
If hedge becomes naked in part or full due to contraction of market
value of ODI, hedge can continue until maturity. Rollover shall be
permitted up to market value on maturity date.
No
Cash settled on
maturity
No rebooking
on cancellation
Yes.
FOREIGN
CURRENCY –
INR SWAPS
If custom duty changes due to Govt. notification after date of forward
contracts can cancel and/ or rebook before maturity.
No
No
Yes
Yes
No
No
No
No
No
No
No
No
N/A
N/A
N/A
N/A
Yes
Yes
No
No
Summary Of
RBI HEDGING REGULATIONS for OTC Hedging
ECBs & FC
loans
domestically
against
FCNR(B)
deposits
FOREIGN
CURRENCY
LIABILITY TO
INR LIABILITY
AND VICEVERSA
Yes
Yes
No
No
No
No
Yes
No
Yes (No
upfront payment
of rupees shall
be undertaken)
No
_________________________________________________________________________________________________________________
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Research & Analysis: Rukmani (Sadhna) Shankar, [email protected]
Disclaimer: This document is our understanding and summarization of the cited regulation. It is offered merely to allow for quicker and easier
understanding of the regulation. It does not purport to be legal advise, nor is intended to replace the original regulation. No guarantee of any kind is
made as to the correctness or accuracy of the information contained herein. This document is offered without acceptance of any liability whatsoever
on the part Kshitij Consultancy Services, it employees or associates. It is subject to change without notice.