RBI tightens forex derivative rules

New Delhi The Reserve Bank of India (RBI) on Saturday announced fresh regulatory measures to curb currency speculation, strengthen risk management and maintain orderly trading in the foreign exchange market. The central bank reduced the threshold for undertaking foreign exchange derivative transactions involving the rupee without establishing an underlying exposure from $100 million to $5 million. The revised limit applies across authorised dealers. A similar reduction has been introduced for exchange-traded currency derivatives involving the rupee across recognised stock exchanges. Under the new directions, authorised dealers will not permit users to rebook rupee-related foreign exchange derivative contracts, whether deliverable or non-deliverable, if the contracts were cancelled with any authorised dealer after the directions were issued. However, rolling over contracts upon maturity will continue to be permitted. The RBI has also directed authorised dealers to obtain and retain undertakings from users entering into rupee-related foreign exchange derivatives to hedge contracted exposures. Users must confirm that the same underlying exposure has not been hedged through another authorised dealer. Additionally, the central bank introduced a Foreign Exchange Risk Reserve (FERR) requirement. For rupee-related derivative contracts exceeding $2 million in notional value, undertaken to hedge current account exposures where users purchase foreign currency against rupees, authorised dealers must maintain a cash reserve with the RBI equivalent to 20 per cent of the rupee value of the notional amount. The reserve must be maintained daily until the contract terminates. Attempts to circumvent the requirement through multiple transactions will be treated as violations.