What changed
This master circular unified all prior instructions on risk management and inter-bank dealings into a single document, replacing multiple circulars. It introduced a sunset clause, making the circular valid only until July 1, 2013, after which an updated version would replace it. The circular also clarified the 15-day document submission rule for forward contracts and the consequences of repeated non-compliance.
What it means for you
Banks must tighten their documentary verification processes for forex derivative contracts, as the 15-day submission window is now explicitly enforced. Repeated failures (more than three times in a financial year) will force banks to demand underlying documents upfront before booking any future contracts. This increases operational discipline but may slow down trade finance for less organized clients.
What you must do
- Update internal systems to track the 15-day document submission deadline for all forward forex contracts.
- Implement a flagging mechanism to identify customers who fail to submit documents more than three times in a financial year.
- Train relationship managers to collect and verify underlying exposure documents at contract booking for high-risk clients.
- Review and align your bank's derivative product documentation with the master circular's requirements before July 1, 2013.
Who it affects
AD Category I banks, Corporate clients with forex exposure, Non-resident banks with rupee accounts, Commodity and freight hedging users
What happens if a customer fails to submit underlying documents within 15 days?
The bank must cancel the forward contract and cannot pass on any exchange gain to the customer. If this happens more than three times in a financial year, the bank must require the customer to submit underlying documents at the time of booking all future contracts.
Does this circular apply to all types of forex derivative contracts?
Yes, it covers forward contracts, overseas commodity and freight hedging, and inter-bank foreign exchange dealings, as governed by FEMA notifications. The rules on document verification apply to both current and capital account transactions.
What is the sunset clause and why does it matter?
The circular has a one-year validity ending July 1, 2013, after which it will be replaced by an updated version. Banks must stay alert for the new circular to ensure compliance with any revised instructions.