A.P. (DIR Series) Circular No. 78
All Category - I Authorised
Madam / Sir,
writing of options against contracted exposures by Indian Residents
Attention of Authorised Dealer
Category - I (AD Cat - I) banks is invited to 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. 32 dated December 28, 2010 -
Comprehensive Guidelines on Over the Counter (OTC) Foreign Exchange
Derivatives and Overseas Hedging of Commodity Price and Freight Risks, as
amended from time to time. Attention is also invited to Reserve Bank circular No. DBOD.No.BP.BC. 86/21.04.157/2006-07 dated
April 20, 2007on Comprehensive Guidelines on Derivatives as well as
the modifications issued through circular No.
DBOD.No.BP.BC. 44/21.04.157/2011-12 dated November 2, 2011.
2. As announced in the Bi-Monthly Monetary Policy Statement on April 7, 2015,
in order to encourage participation in the Over the Counter (OTC) currency
options market and improve its liquidity, it has been decided to permit
resident exporters and importers of goods and services to write (sell)
standalone plain vanilla European call and put option contracts against
their contracted exposure, i.e. covered call and covered put respectively,
to any AD Cat-I bank in India subject to operational guidelines, terms and
conditions given in Annex I to
3. Necessary amendments
(Notification No. FEMA 365/2016-RB dated June 1, 2016) 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.
571 (E) dated June 1st, 2016, a copy of which is enclosed (Annex II).
4. AD Cat-I banks may bring the
contents of this circular to the notice of their constituents and
5. 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.
6. These guidelines will be
reviewed after one year based on experience.
Chief General Manager
I to A.P. (DIR Series) Circular No. 78 dated June 23, 2016
of Covered Call and Put Currency Option contracts by Indian exporters and
importers of goods and services
AD Category-I banks in India who have Reserve Bank’s approval to run
cross-currency and foreign currency-Indian Rupee options books.
Listed companies and their subsidiaries/joint ventures/associates having
common treasury and consolidated balance sheet or unlisted companies with a
minimum net worth of Rs. 200 crore provided appropriate disclosures are
made in the financial statements as prescribed by the Institute of
Chartered Accountants of India (ICAI).
Call: A resident exporter may write (sell) a standalone plain vanilla
European call option contract to an AD Category-I bank in India against the
cover of contracted exposure arising out of exports of goods and services
Put: A resident importer may write (sell) a standalone plain vanilla
European put option contract to an AD Category-I bank in India against the
cover of contracted exposure arising out of imports of goods and services
use of Covered option shall not be considered as a hedging strategy.
a combination of an underlying cash instrument and a generic derivative
product, covered call and covered put options shall be treated as
structured derivative products in terms of the Comprehensive Guidelines on
Derivatives issued vide Circular
DBOD.No.BP.BC. 86/21.04.157/2006-07 dated April 20, 2007, as amended
from time to time.
3. Operational guidelines, terms
the guidelines governing derivative products in general and structured
products in particular of the circular mentioned in para. (2)(d) above and
subsequent amendments thereof will apply, mutatis mutandis, to covered
Category-I banks may enter into covered options with their exporter or
importer constituents only after obtaining specific approval in this regard
from their competent authority (Board / Risk Committee / ALCO) and as per
the terms and conditions contained in A.P.
(DIR Series) Circular No. 32 dated December 28, 2010, as amended
from time to time, on running Cross Currency and Foreign Currency – INR
responsibility of assessing the strength of risk management systems,
financial soundness of the option writer shall rest with the concerned AD
Cat-I bank. AD Category I banks may stipulate safeguards, such as,
continuous profitability, higher net worth, turnover, etc. depending on the
scale of forex operations and risk profile of the option writers.
options may be written against either a portion or the full value of the
Cat-I banks shall treat the exposures against which a covered option has
been written as an “unhedged exposure”. Accordingly, the guidelines issued
vide Reserve Bank Circular DBOD.No.BP.BC.
85/21.06.200/2013-14 dated January 15, 2014 on Capital and
Provisioning Requirements for Exposures to entities with Unhedged Foreign
Currency Exposure shall apply.
option contracts may be written for a period up to the maturity of the
underlying subject to a maximum maturity period of 12 month.
options may be freely cancelled and rebooked subject to the verification of
the underlying by the AD Cat-I bank concerned.
eligible underlying contracted exposures, the option seller may write the
covered option either as a single FCY-INR option or as separate options for
the FCY-USD and USD-INR legs.
operational guidelines and terms and conditions as laid down under
“Contracted Exposures” – Forward Foreign Exchange Contracts, Cross Currency
Options (not involving Rupee) and Foreign Currency-INR Options of the A.P. (DIR Series) No. 32 dated December 28, 2010,
as amended from time to time, shall be applicable to covered options to the
as mentioned in these guidelines, covered options shall not be undertaken
in combination with any other derivative or cash instrument.
provided under Comprehensive Guidelines on Derivatives, as amended from
time to time, authorised dealers may maintain cash margin / liquid
collateral in respect of covered options sold to them by exporters and
importers, if necessary.
Cat-I banks entering into covered options with their constituents may
report the same to CCIL’s reporting platform for OTC foreign exchange
derivatives in terms of our circular
FMD.MSRG.No.75/02.05.002/2012-13 dated March 13, 2013, as amended
from time to time.
4. In addition to the above,
“General Instructions for OTC forex derivative contracts entered by
Residents in India,” as laid down under Section (I)(B) of the A.P. (DIR Series) No. 32 dated December 28, 2010,
as amended from time to time, shall be applicable, mutatis mutandis, to
II to A.P. (DIR Series) Circular No. 78 dated June 23, 2016
Exchange Management (Foreign Exchange Derivative Contracts)
(Amendment) Regulations, 2016
G.S.R. 571(E).- 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 hereby makes the following amendments
in the Foreign Exchange Management (Foreign Exchange Derivative Contracts)
Regulations, 2000 (Notification No.FEMA 25/2000-RB
dated 3rd May 2000) namely:-
1. Short Title and Commencement
(i) These Regulations may be
called the Foreign Exchange Management (Foreign Exchange Derivative
Contracts) (Amendment) Regulations, 2016.
(ii) They shall come in to force
from the date of their publication in the Official Gazette.
2. Amendment of Regulations:
(i) The existing Regulation 4
shall be substituted by the following:
“A person resident in India
may enter into a foreign exchange derivative contract in accordance with
provisions contained in Schedule I, to hedge an exposure to risk or
otherwise, in respect of a transaction permissible under the Act, or rules
or regulations or directions or orders made or issued thereunder.”
(ii) In Schedule I, after the
existing paragraph ‘B’, the following shall be added, viz.:
“(C) Writing of standalone
options against underlying exposure
A person resident in India may
enter into cross-currency option contract (not involving the rupee as one
of the currencies) and / or foreign currency – rupee option contract with
an authorised dealer against an underlying foreign exchange exposure in
respect of a transaction for which sale and / or purchase of foreign
currency is permitted under the Act or the rules or regulations or
directions or orders made or issued thereunder subject to such terms and
conditions as may be stipulated by the Reserve Bank from time to time.”
Chief General Manager