What changed
RBI has permitted SPDs to add foreign exchange activities to their non-core business, following a separate circular on the same date. Additionally, SPDs can now take up trading and self-clearing membership with SEBI-approved exchanges for proprietary equity and equity derivatives transactions, expanding their non-core scope.
What it means for you
SPDs can now diversify into forex dealing, potentially boosting fee income but requiring robust risk management. The 20% cap on non-core capital charge relative to net owned funds limits how much risk they can take across all non-core activities, including forex. Banks with SPD arms must ensure compliance with FEMA, SEBI rules, and updated capital adequacy norms.
What you must do
- Apply to RBI's Foreign Exchange Department for forex authorization if planning to offer forex services.
- Ensure capital charge for market risk in forex exposures is the higher of standardized approach (15% on net open positions) or internal VaR model.
- Monitor that the market risk capital charge for all non-core activities (including forex) does not exceed 20% of net owned funds as per last audited balance sheet.
- Comply with FEMA, Master Direction on Risk Management, OTC Derivatives Market-makers Directions, and internal control guidelines for forex business.
- If taking up equity trading/self-clearing membership, adhere to SEBI norms and exchange eligibility criteria.
Who it affects
Standalone Primary Dealers (SPDs), Banks with SPD subsidiaries, RBI's Foreign Exchange Department, SEBI and stock exchanges/clearing corporations
What is the capital charge for forex market risk under the standardized approach?
SPDs must maintain a 15% capital charge on net open positions (limits or actual, whichever is higher) with a 100% risk weight, over and above the 15% credit risk charge.
Can SPDs now trade equity derivatives on their own account?
Yes, SPDs are permitted to take up trading and self-clearing membership with SEBI-approved exchanges for proprietary transactions in equity and equity derivatives, subject to SEBI norms.
What happens if an SPD fails to meet its primary dealership obligations?
RBI reserves the right to impose restrictions or withdraw permission to undertake forex business if the SPD fails to meet PD obligations or violates regulations.