What changed
Earlier, AD Category-I banks had to obtain quarterly certificates from statutory auditors confirming that outstanding derivative contracts did not exceed underlying exposures. Now, an annual certificate from statutory auditors suffices. The requirement for a client undertaking that the exposure is not used for hedging with another AD bank remains unchanged.
What it means for you
Banks can now reduce the frequency of chasing clients for quarterly audit certificates, lowering operational costs and paperwork. Clients, especially exporters, get relief from quarterly compliance cycles. However, banks must still ensure the annual certificate covers the entire year and continue to obtain the client undertaking at each transaction.
What you must do
- Update internal hedging documentation policies to accept annual statutory auditor certificates instead of quarterly ones.
- Ensure client undertaking forms are still obtained before each derivative transaction to prevent double hedging.
- Communicate the revised requirement to your forex clients and their statutory auditors.
- Train relationship managers and treasury staff on the new annual certification process.
Who it affects
AD Category-I banks, Resident entities using contracted exposure route for forex hedging, Statutory auditors of such entities
Does this circular remove the need for any certificate from the client?
No. The annual statutory auditor certificate replaces the quarterly one, but the client must still give an undertaking that the exposure is not used for hedging with any other AD bank.
What if a client's exposure changes significantly within a year?
The annual certificate must confirm that at any point during the year, outstanding contracts did not exceed the underlying exposure at that time. Banks should rely on the auditor's verification.