What changed
Previously, only plain vanilla options sold to users could have their premium deferred at bank discretion. Now, this deferment facility is extended to cost reduction forex option structures, provided the user's liability never exceeds the net premium payable under any scenario. Conditions include due diligence on user payment ability, uniform quarterly premium payments, and a ban on past-performance-based contracts.
What it means for you
Banks can now offer more flexible premium payment terms on certain complex forex hedges, potentially increasing product uptake. However, they must strengthen due diligence processes and ensure compliance with existing suitability guidelines. This may reduce upfront cost barriers for corporate clients using cost reduction structures.
What you must do
- Update board-approved policy to include due diligence criteria for cost reduction forex option users.
- Ensure premium deferment is only offered for contracts where user liability never exceeds net premium payable.
- Verify that deferred premium payments are uniform, at least quarterly, and do not extend beyond contract maturity.
- Exclude any contracts based on past performance from this facility.
- Align with existing RBI guidelines on structured derivatives and cost reduction structures.
Who it affects
Scheduled commercial banks (excluding RRBs and LABs), All India term-lending and refinancing institutions, Corporate users of forex option structures
What types of forex options are now eligible for premium deferment?
Cost reduction forex option structures where the user's liability never exceeds the net premium payable under any scenario are now eligible, in addition to plain vanilla options.
What are the key conditions for deferring premium on these structures?
Banks must conduct due diligence on user payment ability per board policy. Premium for contracts over one year can be deferred if paid uniformly at least quarterly and within contract maturity. Past-performance-based contracts are excluded.
Does this circular replace existing guidelines on derivatives?
No, these structures remain subject to existing suitability and appropriateness guidelines from the Comprehensive Guidelines on Derivatives (Nov 2011) and Cost Reduction Structures from the Master Circular on Risk Management (July 2012).