What changed
RBI issued revised comprehensive guidelines for OTC foreign exchange derivatives and overseas hedging of commodity price and freight risks, replacing earlier norms. The updated framework, effective February 1, 2011, was developed after consulting banks, corporates, and other stakeholders. Existing derivative guidelines from DBOD circular of April 2007 will also apply to these foreign exchange derivatives.
What it means for you
Banks must align their OTC forex derivative and commodity hedging operations with the new comprehensive guidelines by the effective date. The revised rules aim to strengthen risk management practices and ensure product suitability for users. Non-compliance could lead to regulatory scrutiny, so banks should update internal policies and training accordingly.
What you must do
- Review the annexed comprehensive guidelines and update internal policies for OTC forex derivatives and commodity hedging by February 1, 2011.
- Ensure all derivative transactions comply with the revised rules on user appropriateness, product suitability, and risk management.
- Communicate the new guidelines to all relevant constituents and customers.
- Align existing risk management frameworks with the updated requirements from the DBOD circular of April 2007.
Who it affects
Authorised Dealer Category I banks, Corporate clients using forex derivatives and commodity hedging, Risk management teams at banks
When do the revised guidelines take effect?
The comprehensive guidelines are effective from February 1, 2011.
Do the existing DBOD derivative guidelines still apply?
Yes, the guidelines from DBOD circular DBOD.No.BP.BC. 86/21.04.157/2006-07 dated April 20, 2007, and its amendments, apply mutatis mutandis to foreign exchange derivatives.
What is the legal basis for this circular?
The circular is issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999.