A.P. (DIR Series) Circular No. 19
March 12, 2018
Category - I Authorised Dealer Banks
Hedging of Commodity Price Risk and
Freight Risk in Overseas Markets
(Reserve Bank) Directions
of Authorised Dealer Category - I (AD Category-I) banks is invited to
regulation 6 and 6A of the Foreign Exchange Management (Foreign Exchange
Derivative Contracts) Regulations, 2000 dated May 3, 2000 (Notification
No.FEMA. 25/RB-2000 dated May 3, 2000) issued under clause (h) of
sub-section (2) of Section 47 of FEMA, 1999 (Act 42 of 1999), as amended
from time to time.
RBI had earlier constituted a Working Group to review the guidelines
for Hedging of Commodity Price Risk by Residents in overseas markets (Chairman:
Shri Chandan Sinha). Based on the report of the working group and comments
received on the report, draft directions for hedging of commodity
price risk and freight risk were released for comments on Jan 12, 2018.
Based on the feedback to the draft directions, the Hedging of Commodity
Price Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions,
2018 have been finalized and are enclosed herewith. The revised
directions shall come into force from April 1, 2018.
Residents hedging their commodity price risk and freight risk under a
specific approval from RBI given under the approval route based on the
previous set of guidelines would be permitted to continue hedging under the
said approval till June 30, 2018 or the last date specified in the
approval, whichever is earlier.
The relevant instructions on the subject contained in the following circulars
stand withdrawn as on April 1, 2018:
A. P. (DIR Series) Circular No. 68 dated
January 17, 2012 on “Risk Management and Inter-Bank Dealings -
Section E and F of A. P. (DIR
Series) circular no. 32 dated December 28, 2010 on “Comprehensive
Guidelines on Foreign Exchange Derivatives and Overseas Hedging of
Commodity Price and Freight Risks” and the relevant appendices.
A. P. (DIR Series) Circular No.35 dated
November 10, 2008 on “Remittance related to Commodity Derivative
Contract Issuance of Standby Letter of Credit / Bank Guarantee”
AD Category - I banks may bring the contents of this circular to the notice
of their constituents and customers concerned.
The directions contained in this circular have been issued under Sections
10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999)
and are without prejudice to permissions /approvals, if any, required under
any other law.
(T. Rabi Sankar)
Chief General Manager
RESERVE BANK OF INDIA
FINANCIAL MARKETS REGULATION DEPARTMENT
1st FLOOR, CENTRAL OFFICE, FORT
MUMBAI 400 001
Hedging of Commodity Price Risk and
Freight Risk in Overseas Markets
(Reserve Bank) Directions, 2018
Reserve Bank of India, in exercise of the powers conferred under Sections
10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of
1999) hereby issues the Hedging of Commodity Price Risk and Freight Risk in
Overseas Markets (Reserve Bank) Directions, 2018 dated March 12, 2018 (the
Short Title and commencement
These directions shall be referred to as the Hedging of Commodity Price
Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions, 2018
and they shall come into force on April 1, 2018.
Hedging – The activity of undertaking a derivative transaction to reduce an
identifiable and measurable risk. For the purpose of these directions the
relevant risks are commodity price risk and freight risk.
Eligible entities – Eligible entities refers to residents other than
Direct Exposure to Commodity Price Risk – An eligible entity will be said
to have direct exposure to commodity price risk if
a. It purchases/sells a
commodity (in India or abroad) whose price is fixed by reference to an
international benchmark ; or
b. It purchases/sells a
product (in India or abroad) which contains a commodity and the price of
the product is linked to an international benchmark of the commodity.
Indirect Exposure to Commodity Price Risk – An eligible entity will be said
to have indirect exposure to commodity price risk if it purchases/sells a
product (in India or abroad) which contains the commodity and the price of
the product is not linked to an international benchmark of the commodity.
Exposure to Freight Risk – An eligible entity will be said to have exposure
to freight risk if it is engaged in the business of refining oil or is
engaged in the business of shipping.
Bank(s) – Bank(s) refer to banks licensed as Authorised Dealer – Category I
under section 10 of FEMA, 1999.
Eligible Commodities – Commodities whose price risk may
be hedged are:
a. In case of direct
exposures to commodity price risk: All commodities (except Gold, Gems and
b. In case of indirect
exposures to commodity price risk: Aluminum, Copper, Lead, Zinc, Nickel,
and Tin. This list of eligible commodities would be reviewed annually.
Permitted Products - Permitted products
refer to the following:
Futures and forwards
Vanilla options (call option and put
Products which are combination of either
cash instrument and one or more generic products
Products which are combination of two or
more generic products
Hedging of Commodity Price Risk: Eligible entities having exposure to
commodity price risk for any eligible commodity may hedge such exposure in
overseas markets using any of the permitted products.
Hedging of Freight Risk: Eligible entities having exposure to freight
risk may hedge such exposure in overseas markets by using any of the
Other Operational Guidelines:
Banks may permit eligible entities to hedge commodity price risk and
freight risk overseas using permitted products and may remit outside India
foreign exchange in respect of such transactions after satisfying
themselves that :
a. The entity has exposure
to commodity price risk or freight risk, contracted or anticipated.
b. The quantity proposed
to be hedged and the tenor of the hedge are in line with the exposure.
c. In case of OTC
derivatives, the requirement to undertake OTC hedges is justified.
d. In case of hedging
using a benchmark price other than that of the commodity exposed to, the
requirement to undertake such hedges is justified.
e. Such hedging is taken
up by the management of the entity under a policy approved by the Board of
Directors of a company or equivalent forum for other.
f. The entity has the
necessary risk management policies in place.
g. The entity has
reasonable understanding of the utility and likely risks associated with
the products proposed to be used for hedging.
OTC contracts shall be booked with a bank or with non-bank entities which
are permitted to offer such derivatives by their regulators. For this
purpose, a list of acceptable jurisdictions shall be specified by FEDAI.
Structured products may be permitted to eligible entities who are (a)
listed on recognized domestic stock exchanges or (b) fully owned
subsidiaries of such entities or (c) unlisted entities whose net worth is
higher than INR 200 crores, subject to the condition that such product are
used for the purpose of hedging as defined under these directions.
All payments/receipts related to hedging of exposure to commodity price
risk and freight risk shall be routed through a special account with the
bank for this purpose.
Banks shall keep on their records full details of all hedge transactions
and related remittances made by the entity.
Banks shall obtain an annual certificate from the statutory auditors of the
entity confirming that the hedge transactions and the margin remittances
are in line with the exposure of the entity. The statutory auditor shall
also comment on the risk management policy of the entity for hedging
exposure to commodity price risk and freight risk and the appropriateness
of the methodology to arrive at the quantum of these exposures.
Banks shall undertake immediate corrective action in case of any
irregularity or misuse of these directions. All such cases should be
reported to Chief General Manager, Financial Markets Regulation Department,
Reserve Bank of India.
Standby Letters of Credit (SBLC) / Guarantees - Banks are
permitted to issue Standby Letters of Credit (SBLC) / Guarantees, for a
maximum period of one year, on behalf of their clients in lieu of making a
remittance of margin money for commodity hedging transactions entered into
by their customers. Banks should ensure that these SBLCs / Guarantees are
used by their clients for the intended purposes.
Realisation and repatriation of foreign exchange - Realizations
and repatriation of foreign exchange due or accruing to an eligible entity
resulting from permitted transactions under this direction shall be guided
by the provisions of the Foreign Exchange Management (Realisation,
repatriation and surrender of foreign exchange) Regulations, 2015.
Report to Reserve Bank - Banks shall submit a quarterly
report to the Chief General Manager, Financial Markets Regulation
Department, Reserve Bank of India, in the format provided in Annexure
I in the form of an excel file to email. In case of no
transactions, a “Nil” report may be submitted by the bank.
Report – Hedging of Commodity Price Risk
and Freight Risk in Overseas Markets during the Quarter ending _____
of the Authorised Dealer:
Total outstanding SBLCs / Guarantees issued for hedging of commodity price
SBLCs / Guarantees invoked by the overseas counterparty (Customer wise):
SBLC / Guarantee Amount invoked