A.P. (DIR Series) Circular No. 11
All Authorised Dealer Category -
Risk Management and Inter-Bank
Dealings – Simplified Hedging Facility
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) issued
under clause (h) of sub-section (2) of Section 47 of FEMA, 1999 (Act 42 of
1999), as amended from time to time, the Master Direction - Risk
Management and Inter-Bank Dealings dated July 5, 2016, as amended from time
to time, and the announcement made in the Statement on Developmental and
Regulatory Policies Reserve Bank of India dated August 02, 2017 (para 7) on
the simplified hedging facility
2. The scheme of simplified
hedging facility was first announced by the RBI in August 2016 and the
draft scheme was released on April 12, 2017. The facility is being
introduced with a view to simplify the process for hedging exchange rate
risk by reducing documentation requirements, avoiding prescriptive
stipulations regarding products, purpose and hedging flexibility, and to
encourage a more dynamic and efficient hedging culture.
3. Necessary amendments
(Notification No. FEMA 388/2017-RB dated October 24, 2017) 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.1324 (E) dated
October 24, 2017 a copy of which is given in the Annex II to this
circular. These regulations have been issued under clause (h) of
sub-section (2) of Section 47 of FEMA, 1999 (42 of 1999). The Master
Direction on Risk Management & Interbank dealings dated July 5, 2016,
as amended from time to time, has been updated accordingly.
4. The guidelines of this
facility are given in Annex I to this circular and this facility
will be effective from January 01, 2018.
5. AD Category – I banks may
bring the contents of this circular to the notice of their constituents and
6. 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.
Chief General Manager
I to A.P. (DIR Series) Circular No. 11 dated November 09, 2017]
Hedging Facility Guidelines
Users: Resident and non-resident entities, other than
Purpose: To hedge exchange rate risk on transactions,
contracted or anticipated, permissible under Foreign Exchange Management
Act (FEMA), 19991.
Products: Any Over the Counter (OTC) derivative or Exchange
Traded Currency Derivative (ETCD) permitted under FEMA, 1999.
Cap on Outstanding Contracts: USD 30 million, or its equivalent, on a gross basis.
Designated Bank: Any Authorised Dealer Category-I (AD Cat-I) bank
designated as such by the user.
Operational Guidelines, Terms
i. The user shall appoint an AD
Cat-I bank as its “Designated Bank”. The designated bank will assess the
hedging requirement of the user and set a limit up to the stipulated cap on
the outstanding contracts.
ii. If hedging requirement of
the user exceeds the limit in course of time, the designated bank may
re-assess and, at its discretion, extend the limit up to 150% of the
iii. Hedge contracts in OTC
market can be booked with any AD Cat-I bank, provided the underlying cash
flow takes place with the same bank.
iv. Cost reduction structures
can be booked by users provided that resident unlisted companies can use
such structures only if they have a minimum net worth of Rs.200 crores
v. Users are not required to
furnish any documentary evidence for establishing underlying exposure under
this facility. Users may, however, provide basic details of the underlying
transaction in a standardised format2,
only in the case of OTC hedge contracts.
vi. Cancelled contracts may be
freely rebooked with the same bank.
vii. In case of hedge contracts
booked in OTC market, while losses will be recovered from the user, net
gains i.e. gains in excess of cumulative losses, if any, will be
transferred at the time of delivery of the underlying cash flow. In case of
part delivery, net gains will be transferred on a pro-rata basis.
viii. For hedge contracts on
underlying capital account transactions, gains/losses may be transferred to
the user as and when they accrue if the underlying asset/liability is
already in existence.
ix. On full utilisation of the
limit or in case of breach of limit, user shall not book new contracts
under this facility. In such a case, contracts booked earlier under this
facility will be allowed to continue till they expire or are closed. Any
further hedging requirements thereafter may be booked under other available
x. Users booking contracts under
this facility shall not book contracts under any other facility in OTC or
ETCD market except as provided in para (ix).
xi. At the end of each financial
year, the user will provide the designated bank with a statement signed by
the head of finance or the head of the entity, to the effect that,
contracts booked in both OTC and ETCD market, under this facility, are
backed by underlying exchange rate exposures, either contracted or
exposures underlying the hedge contracts booked under this facility are not
hedged under any other facility.
xii. On being appointed, the
designated bank shall report the details of the users and limits granted to
the Trade Repository (TR). On a request by the TR, the exchanges shall
report all contracts booked by such users to the TR on a daily basis.
xiii. The TR will compute user
wise outstanding position (across OTC and ETCD market) and provide this
information to the designated bank for monitoring. If the outstanding
contracts of a user exceeds the limit (or the extended limit, if
applicable) the designated bank shall advise the user to stop booking new
contracts under this facility.
xiv. When user migrates to other
available facilities, the designated bank shall report this information to
the TR. The TR shall update this information in its records and notify the
recognized stock exchanges to stop reporting data for the user concerned.
xv. Banks shall have an internal
policy regarding the time limit up to which a hedge contract for a given
underlying can be rolled-over or rebooked by the user.
denominated bonds issued overseas may be hedged provided it is permitted
under contracted exposure hedging.
format will be devised by Foreign Exchange Dealers Association of India
(FEDAI) and will include details like transaction type, i.e. current
account (import, export) or capital account (ECB, FPI, FDI etc.), amount,
currency and tenor.