RBI's Norms On Exchange-Traded Currency Derivatives Deferred To May 3

The Reserve Bank of India has deferred implementation of its circular on exchange-traded currency derivatives involving the rupee to May 3, according to a press release on Thursday.

The reiterated circular was to come into effect on April 5 earlier.

In the clarification issued by the RBI on its website, the central bank emphasised that the regulatory framework for rupee derivatives traded on exchanges has "remained consistent over the years and that there is no change in the RBI's policy approach".

The clarification comes after a scramble in the currency derivatives market over the last three days to wind-up existing positions without any existing underlying unhedged exposure. Brokerages complained about a short notice and the fact that this would be detrimental for the currency futures market going ahead, NDTV Profit reported on Wednesday.

"Based on this comprehensive review, public consultations, feedback received from market participants and experience gained, the regulatory framework has been made more comprehensive in respect of all types of transactions—OTC (over-the-counter) and exchange traded—under a single Master Direction to enhance operational efficiency and ease access to foreign exchange derivatives," the RBI said.

The central bank highlighted the existing regulatory framework for participants in the rupee derivatives market "without any change".

Users can take positions in the rupee futures market up to $100 million combined across all exchanges, while ensuring compliance with the requirement of having underlying exposure, the RBI said.

While the circular has undergone amendments over the years "for the purpose of ease of doing business", the RBI highlighted that participants are required to provide documentary evidence to establish the underlying exposure up to $100 million.

Nevertheless, the regulator did not provide any exemption from the requirement of having the exposure, it said.

"For the purpose of ease of doing business, the RBI's circular dated June 20, 2014 permitted users of ETCDs to take positions up to $10 million per exchange, without having to provide documentary evidence to establish the underlying exposure, but did not provide any exemption from the requirement of having the exposure," the central bank said.

Until now, participants who have underlying contracted exposure can continue to transact in the exchange-trade rupee derivatives market up to a limit of $100 million "without having to produce documentary evidence of the underlying exposure", according to the release.

This bit has changed now.

Users are required to provide evidence of the underlying exposure up to $100 million as well.

As the earlier circular was effective from Friday and the RBI has not made any leeway in the norms, it does not change things for brokerages, corporates and retail participants, according to traders from brokerages and corporates.

Most participants had already squared off their existing positions in the dollar/rupee futures market, according to Sajal Gupta, head of forex and commodities at Nuvama Professional Client Group's institutional desk.

"About 95% of people must have squared off their positions," Gupta said. "The only limited benefit is that people, who could not sell their positions today, have got 15–20 more days to do that."

"The original rule still stays, that fresh positions can't be taken if the participant does not have underlying exposure," he said.