The Reserve Bank of India (RBI) on Tuesday issued final guidelines on over-the-counter foreign exchange derivatives and overseas hedging of commodity and freight prices. It included allowing the use of cost-reduction structures and embedded cross-currency options for foreign currency-rupee swaps, a release from the central bank said.
The new norms will be effective from February 1, RBI said. In the draft guidelines, the central bank had refrained from allowing companies to have embedded cost-reduction structures, especially zero-cost ones, in derivatives.
However, after receiving market feedback, RBI has allowed companies having net worth of Rs 100 crore to enter such contracts. But, companies cannot write options on a stand-alone basis and cannot enter exotic options such as leveraged structures and barrier options.
Moreover, the maturity of the hedge by the companies must not exceed the maturity of the underlying, RBI said.
“In case of trade transactions being the underlying, the tenor of the structure shall not exceed two years,” the central bank said. Banks must periodically inform companies about the mark-to-market position of the contract.
Companies could enter into buy and sell positions simultaneously for plain vanilla options, RBI said.