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C. Chandrasekhar
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August 23, 2010
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RBI has recently circulated draft guidelines for use OTC foreign exchange derivatives and overseas hedging of commodity price risk and freight risk.
Some of our observations are:
RBI has rightly proposed to prohibit use of digital options and leveraged structures for the purpose of cost reduction. Apparently, other structures, like swapping Rupee loans in to JPY, with currency protection are likely to continue. Such structures in the past caused significant losses to corporates.
However cost saving structures can be used only by listed companies or unlisted companies with minimum net worth of Rs. 200 cr., who have adopted the As 30-32. In our view, the distinction is not logical as listing does not in any way minimize the derivatives risk.
While cancellation and rebooking of forward contracts is permitted for regular exports and imports (subject to production of appropriate documentary evidence), the facility is not available for deemed exports, which are open to similar market risk.
General instructions state that derived exposures cannot be hedged. The derived exposure is not defined and may cause confusion as to, say, USD/INR risk derived from Euro export sales. RBI probably has in mind that the risk from one derivative cannot be covered by another derivative, which of course is the right stand. If this is the case, INR-FCY swaps with currency protection (which appears to have been permitted under the guidelines) should not be permitted.
Limits based on past performance, once utilized are not to be reinstated either on cancellation or on maturity of the contracts. There is some contradiction with existing instructions. The guidelines also stipulate that 75% of the eligible limit will be on deliverable basis and contracts booked there under cannot be cancelled.
There are many other aspects of the guidelines which could have been clearer, restricting only potentially risky option structures. RBI also should have utilized the opportunity to realign its guidelines with the provisions of AS 30 – 32.