Some Regulations You Must know which Regulates Financial Instruments

Which regulation regulates the foreign exchange market?

The Foreign Exchange Management Act (FEMA) is an Indian law which regulates the activities related to foreign exchange. The main objective of the law is to facilitate external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

What are the regulatory notifications related to derivatives?

Foreign Exchange Derivative Contracts are governed by FEMA Notification No. FEMA 25/RB-2000 dated May 3, 2000 and subsequent amendments thereto. The Master Circular titled“Risk Management and Inter-bank dealing” consolidates the existing instructions on the derivatives at one place. Besides, in April 2007 RBI had issued “Comprehensive Guidelines on Derivatives” which got amended on November 2, 2011. The exchange traded currency derivatives are jointly governed by SEBI and RBI.

Who can transact in currency derivatives in India?

A person resident in India (as defined in FEMA) can transact in OTC forex market on declaration of the underlying exposure (contractual and probable). While transacting on exchange traded currency derivative instruments, any such declaration is not required. However, there are pre-set limits for transacting in currency derivatives.

What are the regulatory requirements for companies to transact in OTC forex derivatives?

The companies need to submit the Board resolution and if required, board approved ‘Risk Management Policy’. Besides, depending upon the type of exposures (contractual and probable) quarterly and annual declaration / certificate is also requires to be submitted.

Enlist some general principles that are applicable to companies for transacting in OTC forex derivative contracts.

Following are some general guidelines to be followed while entering into OTC currency derivatives transaction:

• declaration needs to be submitted that the exposure is unhedged and has not been hedged with another bank;
• derived foreign exchange exposures are not permitted to be hedged;
• the notional amount should not exceed the actual underlying exposure;
• the tenor of the derivative contracts should not exceed the tenor of the underlying exposure;
• only one hedging transaction can be booked against a particular exposure/ part thereof for a given time period;

What are the RBI guidelines for balances in EEFC accounts?

Currently, EEFC balances need to be converted in rupee by the end of next calendar month (i.e. maximum 60 days). Balances in the EEFC accounts can be sold forward by the account-holders provided they remain earmarked for delivery. Such contracts cannot, be cancelled.

Source- AV Rajwade (www.avrco.com)