What changed
Previously, commodity hedging required specific RBI approval or authorization from select ADs. Now, oil marketing and refining companies can hedge up to 50% of their inventory (based on volumes in the quarter before the previous quarter) using OTC or exchange-traded derivatives overseas, with a maximum tenor of one year forward.
What it means for you
This gives oil companies a structured way to manage price risk on inventories, reducing margin volatility. AD Category-I banks must ensure firms have board-approved policies, including mark-to-market and counterparty rules, and conduct due diligence on user appropriateness and suitability.
What you must do
- Verify that the customer has a board-approved policy covering derivatives framework, mark-to-market, and OTC counterparties.
- Ensure the hedging limit does not exceed 50% of inventory based on the quarter preceding the previous quarter.
- Restrict hedge tenor to a maximum of one year forward and route all transactions through a designated AD Category-I bank.
- Collect half-yearly OTC transaction reports from the customer and review board approval before continuing the facility.
- Forward any applications for hedging beyond delegated authority to RBI for approval.
Who it affects
Domestic oil refining and marketing companies, AD Category-I banks authorized for commodity hedging, RBI's Foreign Exchange Department
What is the maximum percentage of inventory that can be hedged under this circular?
Up to 50% of the inventory, based on volumes in the quarter preceding the previous quarter.
What is the maximum tenor allowed for these hedges?
The tenor is restricted to a maximum of one year forward.
Do customers need board approval for this hedging facility?
Yes, the entity must have a board-approved policy covering the derivatives framework, mark-to-market, and OTC counterparties, and the AD must ensure this before approving the facility.