RBI issues clarification on currency derivatives circular, directions to now

The Reserve Bank of India (RBI) on April 4 clarified that there is no change in central bank’s policy approach on regulatory framework for Exchange Traded Currency Derivatives framework. However, the central bank extended deadline to implement exchange traded derivative contract rules to May 3 from April 5 earlier.

This was done after some concerns expressed about participation in the exchange traded currency derivatives (ETCD) market in the light of the RBI currency derivative norms.

“It is emphasised that the regulatory framework for ETCDs has remained consistent over the years and that there is no change in the RBI’s policy approach,” RBI said in a release.

In a circular dated January 5, the central bank said that investors must ensure the existence of a valid underlying contracted exposure which has not been hedged using any other derivative contract, and they should be in a position to establish the same if required.

The underlying in derivatives contracts refers to the order bill, or receipt, in the case of exporters and importers, or documents to support the transaction in  case of remittances.

Earlier today, Moneycontrol reported that retail traders have been hastily exiting their currency-derivative positions, incurring significant losses, after brokers alerted them to an impending RBI circular just days before its implementation deadline. However, experts said that the requirement outlined in the circular is not new and has been in place since at least 2020.

The recent circular merely underscored this requirement and mandated exchanges to inform traders accordingly, they said.

Also, Moneycontrol reported some brokerages have seen a sharp unwinding of currency derivative positions by clients in the last few days, post the Reserve Bank of India’s (RBI)’s clampdown on currency derivative transactions.

At least three brokerage firms Moneycontrol spoke to said there has been a 30-40 percent unwinding in currency derivatives positions over the past two days. They spoke on condition of anonymity.