RBI's New Directive for Forex Derivative Trading: What You Need to Know

April 02, 2024

Forex Derivative Trading

If you're a trader or stock broker in the forex derivative market, you might have heard about the recent RBI (Reserve Bank of India) directions that are shaking things up. But what exactly do these directions mean for you? Let's break it down in simple terms:

Position Up to $100 Million: Traders can take positions (long or short) in INR-based currency contracts without having to establish the existence of underlying exposure. This applies up to a single limit of USD 100 million across all currency pairs involving INR, combined across all Recognized Stock Exchanges. While traders are not required to prove the existence of underlying exposure, they must ensure the presence of a valid underlying contracted exposure that has not been hedged using any other derivative contract. This means that while you don't have to show proof of underlying exposure, you need to have a legitimate reason for taking the position.

Position Beyond $100 Million: If you want to take positions beyond the $100 million limit, you'll need to designate an Authorized Dealer/Custodian. This designated entity will monitor your transactions to ensure that your positions:

·       Are backed by contracted exposure

·       Have not been hedged using any other derivative contract

·       Adhere to the value and tenor of the exposure

Role of Stock Broker: The broker must ensure that trader designate an Authorized Dealer/Custodian for positions beyond $100 million. Additionally, for positions up to $100 million, brokers may take an undertaking from traders. This undertaking includes commitments to maintain positions in line with exposure and provide evidence of underlying exposure upon request. This process adds an extra layer of assurance and accountability to the trading process, fostering transparency and regulatory compliance.

Role of designated Authorized Dealer/Custodian: The designated Authorized Dealer/Custodian will keep an eye on your day-end open positions and intra-day highest positions if you go beyond the $100 million limit. This is to ensure transparency and risk management.