What changed
Previously, hedging domestic sale/purchase transactions in international commodity exchanges was not permitted. Now, AD Category-I banks specifically authorized by RBI can allow hedging for select metals (aluminium, copper, lead, nickel, zinc) and ATF. For metals, hedging is capped at the higher of the average of the last three financial years' actual purchases/sales or the previous year's turnover, using only exchange-traded futures and options (purchases only). For ATF, OTC contracts are also allowed against firm orders.
What it means for you
Banks can now facilitate hedging for domestic commodity price risks in international markets, expanding revenue opportunities. This reduces clients' exposure to volatile domestic prices, especially for metals and ATF, but requires strict adherence to exposure limits and documentation. Banks must ensure clients have board-approved hedging policies and route all transactions through a designated AD Category-I bank.
What you must do
- Apply afresh to RBI for authorization to offer these new hedging facilities, even if already authorized for listed companies.
- Verify clients' economic exposures using the higher of average of last three financial years' purchases/sales or previous year's turnover for metals.
- Ensure ATF hedging is only against firm orders with retained documentary evidence.
- Require clients to have board-approved policies defining derivatives activity framework and risk controls.
- Submit monthly returns to RBI as specified for authorized banks.
Who it affects
AD Category-I banks authorized for commodity hedging, Domestic producers and users of aluminium, copper, lead, nickel, and zinc, Actual users of aviation turbine fuel (ATF), Companies listed on recognized stock exchanges seeking hedging
Can we hedge domestic metal purchases for any commodity under this circular?
No, only specific metals—aluminium, copper, lead, nickel, and zinc—are covered. Other commodities require separate RBI approval as per para 4.
Are OTC contracts allowed for metal hedging?
No, only standard exchange-traded futures and options (purchases only) are permitted for metals. OTC is allowed only for ATF hedging.
What is the exposure limit for metal hedging?
Hedging is permitted up to the higher of the average of the previous three financial years' actual purchases/sales or the previous year's actual purchases/sales turnover for those metals.