What changed
Previously, all forward contracts booked under past-performance-based hedging had to be fully deliverable, with exchange gains not passed to the customer on cancellation. Now, contracts up to 75% of the eligible limit can be cancelled with the customer bearing or receiving the gain/loss. Contracts above 75% remain deliverable and cannot be cancelled; if cancelled, the customer bears the loss but forfeits any gain.
What it means for you
Banks can offer greater flexibility to exporters and importers in managing currency risk, as partial cancellations are now allowed for up to 75% of the eligible hedging limit. This reduces the rigidity of earlier rules, enabling customers to adjust positions without losing all gains. However, the 25% portion above 75% remains strictly deliverable, limiting speculative cancellations.
What you must do
- Update internal hedging policies to reflect the new 75% cancellation threshold for past-performance-based forward contracts.
- Train treasury and relationship teams on the revised rules, especially the distinction between cancellable (up to 75%) and non-cancellable (above 75%) portions.
- Communicate the changes to exporter and importer customers, highlighting the operational flexibility and the conditions for gain/loss pass-through.
- Ensure systems can track eligible limits and cancellation status to comply with the deliverable requirement for contracts above 75%.
Who it affects
AD Category-I banks, Exporters hedging currency risk based on past performance, Importers hedging currency risk based on past performance
What is the eligible limit for hedging under this circular?
For exporters, the eligible limit is the higher of the average of the previous three financial years' actual export turnover or the previous year's actual export turnover. For importers, it is 25% of the higher of the average of the previous three years' actual import turnover or the previous year's actual import turnover.
Can a customer cancel a forward contract booked under this facility and still receive the exchange gain?
Yes, but only for contracts booked up to 75% of the eligible limit. For those contracts, the customer bears the loss or is entitled to the gain on cancellation. For contracts booked above 75%, cancellation is not allowed; if cancelled, the customer bears the loss but does not receive any gain.