Mumbai: The Reserve Bank of India (RBI) on Wednesday withdrew facility of zero-cost or cost reduction structures to ensure more transparency in forex derivatives trading. Since importers and exporters are permitted to write “covered call & put options both in foreign currency-rupee and cross currency and also receive premia in similar currencies,” RBI feels such facilities should be pulled out with immediate effect.
Accordingly, to ensure further lucidity in this regard, a declaration on monthly basis by the customers on amounts booked and the past performance need to be submitted to the central bank.
“RBI wants to ensure that all the checks are in place and all the details of the transaction are being revealed. The company also needs to make sure that an annual certificate is given by the company's board whereby all derivative transactions are authorised and the board is aware of the same,” a source said.
Besides, a common declaration also needs to be given that the derivatives exposure risks are being hedged properly among the participants.
“In the past, when the scam on the forex derivatives took place, it was found out on scrutinising that the underlying documents given by way of fax or mail was duplicated in some cases. Hence, going forward, every bank needs to ensure that a certificate is obtained from a statutory auditor on annual basis,” said the source.
Sources also added that banks also need to declare the amounts of exposure hedged with other banks, especially when the hedging is done in parts.
Talking about the product features, sources said the complex structured products are done away with and a plain vanilla cross currency option at the time of inception is allowed.
One such public sector bank in the country had hedged a seven-year rupee liability for 7%, moved over to yen, which later appreciated heavily against the dollar, thereby citing losses.
Premiums also should be determined in a transparent manner and options may not be combined with other derivative products, the source said.
The RBI, in its draft on forex derivatives, has said that banks can hedge their risks arising out of movement in gold prices and currency, assets and liabilities.
“Banks having adequate internal control, risk monitoring and management systems and mark-to-market mechanism are permitted to run a foreign currency-rupee options book subject to prior approval from the RBI,” it said.
Banks and companies can cancel and rebook their forward contracts, provided they give their exposure information.
Source : Financialexpress.com