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August 2014

A. P. (DIR Series) Circular No. 147 dated 20th June, 2014

By Gaurang Gandhi Chartered Accountant
Reading Time 2 mins
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Risk Management and Inter-bank Dealings: Guidelines relating to participation of Residents in the Exchange Traded Currency Derivatives (ETCD) market

Presently:
1. D omestic participants in the currency futures and exchange traded options markets are not required to have any underlying exposure. While domestic participants in the over-the-counter (OTC) derivatives markets are compulsorily required to have underlying exposure.
2. Banks are not allowed to offset their positions in the ETCD market against the positions in the OTC derivatives market and are also not allowed to carry out any proprietary trading in the ETCD market.

This circular provides that: –
1. Domestic participants in the currency futures and exchange traded currency options will have to comply with the following terms and conditions:
a. Domestic participants are allowed to take a long (bought) as well as short (sold) position up to US $ 10 million per exchange without having to establish the existence of any underlying exposure.
b. D omestic participants who want to take a position exceeding US $ 10 million in the ETCD market will have to establish the existence of an underlying exposure. The procedure to be followed for the same is given in the circular.

2. Banks can:
a. U ndertake proprietary trading in the ETCD market within their Net Open Position Limit (NOPL)/limit imposed by the exchanges for the purpose of risk management and preserving market integrity.
b. N et/offset their positions in the ETCD market against the positions in the OTC derivatives markets.

There will be no upper limit on the position that can be taken by any participant, resident or non-resident, in the ETCD market, except limits that are imposed by SEBI for risk management and preserving market integrity.

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