RBI issues draft guidelines on OTC forex derivatives

The Reserve Bank of India (RBI) has announced draft guidelines on over the counter (OTC) foreign exchange derivatives and hedging commodity price risk and freight risk overseas.

Under the draft guidelines, RBI has proposed that importers and exporters having foreign currency exposures in trade transactions will be permitted to write covered call and put options both in foreign currency-rupee and cross currency and also receive premia.

Authorised dealer Category I banks will be permitted to offer plain vanilla cross currency options to persons resident in India (other than AD Category- I banks), who transform their rupee liability to a foreign currency liability.

Since importers and exporters are being permitted to write covered call and put options both in foreign currency and rupee as well as cross currency and also receive premia, the facility of zero cost structures/cost reduction structures will be withdrawn. 

RBI said the draft guidelines have been prepared after an internal group reviewed the existing guidelines on foreign exchange and commodity and freight derivatives overseas in the light of the developments in the domestic and international financial markets and based on the feedback received from banks, market participants, industry associations and others.

Reserve Bank has since proposed (in the Second Quarter Review of Monetary Policy for the Year 2009-10) to place the draft guidelines on the website for wider comments / views from the market participants / users of foreign exchange derivatives.

The RBI today, placed on its website and comments on the draft guidelines may be forwarded to the chief general manager-in-charge, foreign exchange department, foreign markets division of Reserve Bank of India at its Mumbai office or emailed by 15 December 2009, RBI said in its release.