RBI defers implementing rules on exchange-traded forex derivatives to May 3

RBI said the regulatory framework for participation in ETCDs involving the Indian rupee (INR) is guided by the provisions of the Foreign Exchange Management Act (FEMA), 1999

The Reserve Bank of India (RBI) Thursday deferred the implementation of norms on exchange-traded currency derivatives (ETCDs) linked to Indian rupee until May 3 following concerns by investors.  The norms were scheduled to take effect starting Friday.

“In view of the feedback received and recent developments, it has been decided that these directions will now come into effect from May 3,” according to a press release issued by the RBI post market hours. 
 

Now, rupee-denominated currency contracts traded on the National Stock Exchange (NSE) and the BSE require underlying exposure. Though traders are not required to provide evidence of underlying exposure for positions up to $100 million, they must confirm the existence of such exposure.
 

The RBI said the regulatory framework for participation in ETCDs involving the rupee is guided by the provisions of the Foreign Exchange Management Act (FEMA), 1999, and regulations framed thereunder, which mandate that currency derivative contracts involving rupee — both over-the-counter (OTC) and exchange traded — are permitted only for the purpose of hedging of exposure to foreign exchange rate risks.

The norms, the RBI said, reiterated the regulatory framework for participation in ETCDs involving the rupee without any change. 

As hitherto, participants with a valid underlying contracted exposure can continue to enter into ETCDs involving the rupee up to a limit of $100 million without having to produce documentary evidence of the underlying exposure.

“Thus, it is emphasised that the regulatory framework for ETCDs has remained consistent over the years and that there is no change in the RBI’s policy approach,” the press release said. 

The significant volatility in the rupee’s exchange-traded derivatives continued on Thursday as brokers advised their clients to either unwind positions or provide evidence of underlying forex exposure.

“The positions have already been liquidated, nothing changes. The circular came after market hours, whatever had to happen has already happened,” said Ritesh Bhansali, vice-president at Mecklai Financial Services.

“The circular has not changed or modified; they have just changed the date. If the circular has come today and they said the regulatory frameworks remain the same, that means nothing is going to change in future as well,” he said.

Following the central bank’s notification, some market participants expressed optimism that the volatility in the rupee’s exchange-traded derivatives, particularly options, might decrease.

“The immediate implications of the circular wouldn’t be any for now as there is no change in the RBI’s policy approach to the regulatory framework. However, trading volumes on such platforms could experience a rise that had slumped sharply in the past two days due to the unwinding of positions. Further, the pressure on the options premiums could stabilise,” said Amit Pabari, managing director at CR Forex. “The option premium which had risen to 3.5 per cent might come down to 1.5 per cent- 2 per cent,” he added.

Transactions in currency futures were primarily driven by the retail segment who couldn't transact in OTC markets because banks demanded proof of underlying exposure, which they didn’t have. These retail trades accounted for more than 50 per cent of total transactions and contributed significantly to liquidity in exchange-traded currency futures. Initially, when currency futures trading began in August 2008, the RBI allowed transactions in dollar-rupee currency futures for hedging foreign exchange rate risks or other purposes.