Guidelines
on Trading of Currency Options
[RBI Circular No. 05 dated 30th July
2010]
Sub: Guidelines on trading of Currency Options on Recognised Stock / New Exchanges
Attention
of Authorised Dealers Category – I (AD Category – I) banks
is invited to the Foreign Exchange Management (Foreign Exchange Derivative
Contracts) Regulations, 2000 dated May 3, 2000 [Notification No.
FEMA/25/RB-2000 dated May 3, 2000], as amended from time to time and A.P. (DIR
Series) Circular No. 05 dated August 6, 2008 in terms of which persons resident
in India were permitted to participate in the currency futures market in India
subject to directions contained in the Currency Futures (Reserve Bank)
Directions, 2008.
2. In order to
expand the existing menu of exchange traded hedging tools, it was announced in
the Monetary Policy Statement 2010-11 (para 62) that recognised stock exchanges would be permitted to introduce
plain vanilla currency options on spot US Dollar/ Rupee exchange rate for
residents. Accordingly, it has been decided to permit trading of currency
options on spot USD-INR rate in the currency derivatives segment of the stock
exchanges, recognized by the Securities and Exchange Board of India (SEBI). The
currency options market would function subject to the directions, guidelines,
instructions, rules, etc issued by the Reserve Bank and the SEBI from time to
time.
3. Persons
resident in India are permitted to participate in the currency options market,
subject to the directions contained in the Exchange Traded Currency Options
(Reserve Bank) Directions, 2010, [Notification No.FED.01 / ED (HRK)-2010 dated
July 30, 2010] (Directions) issued by the Reserve Bank of India, a copy of
which is annexed (Annex-I).
4. Necessary
amendments to Foreign Exchange Management (Foreign Exchange Derivatives
Contracts) Regulations, 2000 (Notification No. FEMA.25/RB-2000 dated May 3,
2000) (Regulations) have been notified in the Official Gazette vide G.S.R. No.
635(E) dated July 27, 2010, a copy of which is annexed (Annex-II).
5. The above
Directions have been issued under Section 45W of the Reserve Bank of India Act,
1934 and the above Regulations have been issued under clause (h) of sub-Section
(2) of Section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999).
6. This circular has been issued under Sections 10(4) and 11(1) of
the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice
to permissions / approvals, if any, required under any other law.
Annex – I [A.P.
(DIR Series) Circular No. 05 dated July 30, 2010]
Exchange
Traded Currency Options (Reserve Bank) Directions, 2010 Notification No. FED.01
/ ED (HRK) - 2010 dated July 30, 2010
The
Reserve Bank of India having considered necessary in public interest and having
regard to the need for regulating the financial system of the country to its
advantage, in exercise of its powers conferred by section 45W of the Reserve
Bank of India Act, 1934 and of all the powers enabling it in this behalf,
hereby gives the following directions to all the persons dealing in currency
options on recognised stock exchanges.
1. Short title
and commencement of the directions
These directions may be called the Exchange Traded
Currency Options (Reserve Bank) Directions, 2010 and they shall come into force
with effect from July 30, 2010.
2. Applicability
These directions shall apply to currency options traded
on a stock exchange recognised under Section 4 of the
Securities Contract (Regulation) Act, 1956.
3. Permission
(i) Currency option contracts are permitted in US Dollar - Indian
Rupee spot rate, or any other currency pairs, as may be approved by the Reserve
Bank from time to time.
(ii) Only
‘persons resident in India’, as defined in section 2(v) of the Foreign Exchange
Management Act, 1999 (Act 42 of 1999) are permitted to buy or sell exchange
traded currency options to hedge an exposure to foreign exchange rate risk or
otherwise.
4. Features of
currency option contracts
Standardized exchange traded currency options shall
have the following features:
a) The
underlying for the currency option shall be US Dollar – Indian Rupee (USD-INR)
spot rate. b) The options shall
be premium styled European call and put options.
c) The size of
each contract shall be USD 1000.
d) The premium shall
be quoted in Rupee terms. The outstanding position shall be in USD.
e) The maturity
of the contracts shall not exceed twelve months.
f) The
contracts shall be settled in cash in Indian Rupees.
g) The
settlement price shall be the Reserve Bank’s Reference Rate on the date of
expiry of the contracts.
5. Participants
i) No person other than 'a person resident in
India', as defined in section 2(v) of the Foreign Exchange Management Act, 1999
(Act 42 of 1999) shall participate in the exchange traded currency options
market.
ii) Notwithstanding
sub-paragraph (i), no scheduled bank or such other
agency falling under the regulatory purview of the Reserve Bank under the
Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949 or any other
Act or instrument having the force of law shall participate in the exchange
traded currency options market without the permission from the respective
regulatory Departments of the Reserve Bank.
iii) Entities
falling under the regulatory purview of any other regulators established by law
shall participate in the exchange traded currency options market only with the
prior permission of their regulators concerned and participation of such
entities as members or clients shall be in accordance with the guidelines issued
by the regulator concerned.
6. Membership
i) Members registered with the SEBI for trading
in currency futures market shall be eligible to trade in the exchange traded
currency options market of a recognised stock
exchange. Membership for both trading and clearing, in the exchange traded
currency options market shall be subject to the guidelines issued by the SEBI.
ii) Banks
authorized by the Reserve Bank under section 10 of the Foreign Exchange
Management Act, 1999 as ‘AD Category - I bank’ are permitted to become trading
and clearing members of the exchange traded currency options market of the
recognized stock exchanges, on their own account and on behalf of their
clients, subject to fulfilling the following minimum prudential requirements:
a) Minimum net
worth of Rs. 500 crores. b) Minimum CRAR of 10 per
cent. c) Net NPA should not exceed 3 per cent. d) Made net profit for last 3
years.
The AD Category - I banks, which fulfil
the prudential requirements, should lay down detailed guidelines with the
approval of their Boards for trading and clearing of the exchange traded
currency options contracts and management of risks.
iii) AD Category
- I banks, which do not meet the above minimum prudential requirements and AD
Category - I banks, which are Urban Co-operative banks or State Co-operative
banks, can participate in the exchange traded currency options market only as
clients, subject to approval therefor from the
respective regulatory Departments of the Reserve Bank.
7. Position
limits
i) The position limits for various classes of
participants for the currency options shall be subject to the guidelines issued
by the SEBI.
ii) The AD
Category - I banks shall operate within prudential limits, such as Net Open
Position (NOP) and Aggregate Gap (AG) limits. The option position of the banks,
on their own account, in the exchange traded currency options shall form part
of their NOP and AG limits.
8. Risk
Management measures
The trading of exchange traded currency options shall
be subject to maintaining initial, extreme loss and calendar spread margins and
the Clearing Corporations / Clearing Houses of the exchanges should ensure
maintenance of such margins by the participants on the basis of the guidelines
issued by the SEBI from time to time.
9. Surveillance
and disclosures
The surveillance and disclosures of transactions, in
the exchange traded currency options market, shall be carried out in accordance
with the guidelines issued by the SEBI.
10. Authorisation to the Exchanges / the Clearing Corporations
for dealing in Currency Options
Recognized stock exchanges and their respective
Clearing Corporations / Clearing Houses shall not deal in or otherwise
undertake the business relating to the exchange traded currency options unless
they hold an authorisation issued by the Reserve Bank
under section 10 (1) of the Foreign Exchange Management Act, 1999.
11. Powers of
Reserve Bank
The Reserve Bank may from time to time modify the
eligibility criteria for the participants and participant-wise position limits,
prescribe margins and / or impose specific margins for identified participants,
fix or modify any other prudential limits, or take such other actions as deemed
necessary in public interest, in the interest of financial stability and
orderly development and maintenance of the foreign exchange market in India.
(H.R.Khan)
Executive Director
Annex – II [A.P.
(DIR Series) Circular No. 05 dated July 30, 2010]
Notification
No. FEMA 210 /RB-2010 dated July 19, 2010
Foreign
Exchange Management (Foreign Exchange Derivative Contracts) (Amendment)
Regulations, 2010
In
exercise of the powers conferred by clause (h) of sub-section (2) of section 47
of the Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank of
India makes the following amendments in the Foreign Exchange Management
(Foreign Exchange Derivative Contracts) Regulations, 2000, (Notification No.
FEMA 25/RB-2000 dated May 3, 2000) namely:-
1. Short
Title and Commencement
(i) These Regulations may be called the Foreign Exchange Management
(Foreign Exchange Derivative Contracts) (Amendment) Regulations, 2010.
(ii) They shall
come into force from the date of their publication in the Official Gazette.
2. Amendment
of the Regulations
In
the Foreign Exchange Management (Foreign Exchange Derivative Contracts)
Regulations, 2000 (Notification No. FEMA 25/RB-2000 dated May
3, 2000), for Regulation 5A, the following shall be substituted, namely:--
“5A.
Permission to a person resident in India to enter into currency futures or
currency options
A
person resident in India may enter into currency futures or currency options on
a stock exchange recognized under section 4 of the Securities Contract
(Regulation) Act, 1956, to hedge an exposure to risk or otherwise, subject to
such terms and conditions as may be set forth in the directions issued by the
Reserve Bank of India from time to time.”
(Salim Gangadharan)
Chief General Manager-in-Charge