Reserve Bank Defers ETCD Regulations Following Stakeholder Feedback
The Reserve Bank of India (RBI) has announced the deferral of the implementation of its directions concerning exchange-traded currency derivatives (ETCD) linked to the rupee to May 3. This decision comes in response to feedback received from stakeholders, indicating a need for further consideration and adjustments to the regulatory framework.
Initially scheduled to come into effect on April 5, 2024, the directives outlined in the circular issued on January 5 pertaining to ‘Risk Management and Inter-Bank Dealings — Hedging of Foreign Exchange Risk’ will now be enforced a month later. The RBI emphasized that there have been no changes in its policy approach, and the regulatory framework for ETCDs remains consistent over the years.
The central bank clarified that the January circular reiterates the existing regulatory framework for participation in ETCDs involving the Indian rupee (INR), without introducing any alterations. It ensures that participants with valid underlying contracted exposure can continue to engage in ETCDs involving the INR, up to a limit of USD 100 million, without the requirement of producing documentary evidence of the underlying exposure.
Highlighting the underlying principles governing the regulatory framework, the RBI emphasized that currency derivative contracts involving the INR, whether over-the-counter (OTC) or exchange-traded, are permitted solely for the purpose of hedging exposure to foreign exchange rate risks. This regulatory stance is in alignment with the provisions of the Foreign Exchange Management Act (FEMA), 1999, and the regulations framed thereunder.
Furthermore, the RBI underscored its efforts to enhance operational efficiency and facilitate access to foreign exchange derivatives by consolidating all types of transactions under a single master direction. This comprehensive approach aims to streamline regulatory processes and promote ease of compliance for market participants across both OTC and exchange-traded segments.
The decision to defer the implementation of ETCD regulations underscores the RBI’s commitment to fostering a conducive regulatory environment that balances the need for risk management with the facilitation of market participation and innovation.
