Master Circular on Risk Management & Inter-Bank Dealings (2011)

What changed

This 2011 master circular consolidated all prior instructions on risk management and inter-bank foreign exchange dealings into a single document. It introduced a sunset clause, meaning the circular would expire on July 1, 2012, and be replaced by an updated version. Key operational guidelines for forward contracts were reiterated, including a 15-day window for submitting underlying documents and restrictions on passing exchange gains if documents are late.

What it means for you

Banks must ensure strict adherence to the 15-day document submission rule for forward contracts, as repeated non-compliance (more than three times in a financial year) will require upfront document production. The sunset clause signals RBI's intent to regularly update these guidelines, so banks should stay alert for the 2012 replacement circular. This consolidation simplifies compliance by having all rules in one place.

What banks were required to do at the time

• Verify underlying exposure documents for all forward contracts within 15 days of booking.
• Cancel contracts and withhold exchange gains if documents are not submitted within 15 days.
• Track customer compliance: after three late submissions in a financial year, require documents upfront for future contracts.
• Prepare for the sunset clause: review and update internal policies before July 1, 2012, when this circular expires.
• Ensure all derivative contracts are booked only against genuine underlying exposures as per FEMA provisions.

Who it affects

All Authorised Dealers Category I banks, Persons resident in India using forex derivatives for hedging, Non-resident banks with rupee accounts, Compliance and risk management teams in banks