RBI defers exchange traded currency derivatives norms

Says framework for ETCD consistent; No change in policy approach

THE RESERVE Bank of India (RBI) on Thursday deferred the implementation of its new norms for exchange traded currency derivatives (ETCD) market to May 3 from April 5. This comes after market participants raised concerns over participation in the Etcdmarketandtherunuptothe April 5 deadline saw a sharp rise in volatility in the forex market.

“In view of feedback received and recent developments, it has been decided that these directions (on ETCD) will now come into effect from Friday May 3, 2024,” the RBI said in a release. It, however, emphasised that the regulatory framework for ETCDS has remained consistent over the years and that there has been no change in the policy approach.

In January this year, the RBI released a new framework for hedging of foreign exchange risks, which was to be implemented from April 5, 2024. The new norm allowed users to take positions (long or short) in foreign exchange derivatives market, without having to establish existence of underlying exposure, up to a single limit of $100 million equivalent contracted exposure which has not been hedged using any other derivative contract and should be in a position to establish the same when required.

On Thursday, the RBI said the regulatory framework for participation in ETCDS involving the 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 rupee — both over-the-counter (OTC) and exchange traded — are permitted only for the purpose of hedging of exposure to foreign exchange rate risks.

The regulatory framework has been reiterated in the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, which states that a person may enter into an ETCD contract involving the rupee only for the purpose of hedging a contracted exposure.

For the purpose of ease of doing business, the RBI permitted users of ETCDS to take positions up to $10 million per exchange without having to provide documentary evidence to establish the underlying exposure but did not provide any exemption from the requirement of having the exposure, the release said.

“Accordingly, users are expected to ensure compliance with the requirement of having underlying exposure,” the regulator said. The limit of $10 million per exchange was subsequently amended and currently stands at a single limit of $100 million combined across all exchanges.

The RBI said its January 5, 2024 master direction reiterates the regulatory framework for participation in ETCDS involving the rupee without any change. “As hitherto, participants with a valid underlying contracted exposure can continue to enter into ETCDS involving the rupee up to a limit of $100 million without having to produce documentary evidence of the underlying exposure,” the release said.

In order to comply with the RBI’S April 5 deadline, foreign exchange brokers asked their clients to close their derivative positions before the stipulated time period to meet the regulatory norms. In a run up to this deadline, the forex market saw an increase in volatility. On Wednesday, the rupee closed at a record low of 83.44 against the US dollar. The domestic currency ended flat on Thursday.