Rupee Derivatives

RBI circular dated 21st January, 2020 allowing rupee derivatives (with settlement in foreign currency) by the IFSC Banking Units.

https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11794&Mode=0

Please refer to RBI circular DBR.IBD.BC.14570/23.13.004/2014-15 dated April 01, 2015, as modified from time to time, setting out RBI directions relating to IFSC Banking Units (IBUs).

2. The Task Force (TF) on Offshore Rupee Markets chaired by Smt. Usha Thorat had recommended introduction of non-deliverable Rupee Derivatives in IFSCs in a phased manner, starting with exchange traded currency derivatives (ETCD) to be followed by Over the Counter (OTC) derivatives at a later stage.

3. RBI’s decision to accept the above recommendation and permit Rupee derivatives (with settlement in foreign currency) to be traded in IFSC was announced in para 2 of the Statement on Developmental and Regulatory policies issued on October 04, 2019. Accordingly, a new paragraph No.2.6 (xiv), has been added to Annex I and II of the aforesaid circular dated April 1, 2015, which reads as under:

“IBUs are allowed to participate in exchange traded currency derivatives on Rupee (with settlement in foreign currency) listed on stock exchanges set up at IFSCs. Banks shall ensure that their IBUs have necessary expertise to price, value and compute the capital charge and manage the risks associated with the products / transactions intended to be offered and should also obtain their Board’s approval for undertaking such transactions. IBUs shall follow all other risk mitigation and prudential measures as applicable and detailed in this circular while participating in these products. Further, IBUs may also be guided by A.P (DIR Series) Circular No. 17 on “Introduction of Rupee derivatives at International Financial Services Centres (IFSCs)” dated January 20, 2020.”

4. Further, the existing paragraph 2.6(vii) of Annex I and II of the aforesaid circular dated April 01, 2015, is amended by adding the following at the end thereof:

“This is subject to the provisions of paragraph 2.6(xiv).”

5. All other terms and conditions contained in the aforementioned circular remain unchanged.

6. An updated copy of the RBI circular on IBU dated April 01, 2015 incorporating the amendments made hitherto is available on RBI’s website.

IFSC regulator

PIB press release dated 6th February, 2019

The Union Cabinet chaired by the Prime Minister Narendra Modi has approvedestablishment of a unified authority for regulating all financial services in International Financial Services Centres (IFSCs) in India through International Financial Srvices Centres Authority Bill, 2019.

          The first IFSC in India has been set up at GIFT City, Gandhinagar, Gujarat. An IFSC enables bringing back the financial services and transactions that are currently carried out in offshore financial centers by Indian corporate entities and overseas branches / subsidiaries of financial institutions (FIs)to India by offering business and regulatory environment that is comparable to other leading international financial centers in the world like London and Singapore. It would provide Indian corporates easier access to global financial markets. IFSC would also compliment and promote further development of financial markets in India.

          Currently, the banking, capital markets and insurance sectors in IFSC are regulated by multiple regulators, i.e. RBI, SEBI and IRDAI. The dynamic nature of business in the IFSCs necessitates a high degree of inter-regulatory coordination. It also requires regular clarifications and frequent amendments in the existing regulations governing financial activities in IFSCs. The development of financial services and products in IFSCs would require focussed and dedicated regulatory interventions. Hence, a need is felt for having a unified financial regulator for IFSCs in India to provide world class regulatory environment to financial market participants. Further, this would also be essential from an ease of doing business perspective. The unified authority would also provide the much needed impetus to further development of IFSC in India in-sync with the global best practices.

          Taking into account the regulatory requirements of IFSCs and the provisions of the existing laws of financial sector, the Department of Economic Affairs (DEA), Ministry of Finance (MoF) has prepared a draft Bill to set up a separate unified regulator for IFSCs. Following are the main features of the Bill:

Management of the Authority:  The Authority shall consist of a Chairperson, one Member each to be nominated by the Reserve Bank of India (RBI), the Securities Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority(PFRDA), two members to be dominated by the Central Government and two other whole-time or full-time or part-time members.

Functions of the Authority:  The Authority shall regulate all such financial services, financial products and FIs in an IFSC which has already been permitted by the Financial Sector Regulators for IFSCs. The Authority shall also regulate such other financial products, financial services or FIs as may be notified by the Central Government from time to time. It may also recommend to the Central Government such other financial products, financial services and financial institutions which may be permitted in the IFSCs.

Powers of the Authority: All powers exercisable by the respective financial sector regulatory (viz. RBI, SEBI, IRDAI, and PFRDA etc.) under the respective Acts shall be solely exercised by the Authority in the IFSCs in so far as the regulation of financial products, financial services and FIs that are permitted in the IFSC are concerned.

Processes and procedures of the Authority: The processes and procedures to be followed by the Authority shall be governed in accordance with the provisions of the respective Acts of Parliament of India applicable to such financial products, services or institutions, as the case may be.

Grants by the Central Govt.:  The Central Govt. may, after due appropriation made by Parliament by law in this behalf, make to the Authority grants of such sums of money as the Central Government may think fit for being utilized for the purposes of the Authority.

Transactions in foreign currency: The transactions of financial services in the IFSCs shall be done in the foreign currency as specified by the Authority in consultation with the Central Govt.

          The establishment of a unified financial regulator for IFSCs will result in providing world-class regulatory environment to market participants from an ease of doing business perspective. This will provide a stimulus for further development of IFSCs in India and enable bringing back of financial services and transactions that are currently carried out in offshore financial centres to India. This would also generate significant employment in the IFSCs in particular as well as financial sector in India as a whole.     

Setting up of IFSC Banking Units (IBUs)

RBI notification dated 17th May on the subject

Please refer to RBI circular DBR.IBD.BC.14570/23.13.004/2014-15 dated April 01, 2015, as modified from time to time, setting out RBI directions relating to IFSC Banking Units (IBUs).

2. In terms of para 2.3 of the circular, the parent bank will be required to provide a minimum capital of USD 20 million or equivalent in any foreign currency to start their IBU operations and the IBU should maintain the minimum prescribed regulatory capital on an on-going basis as per regulations amended from time to time.

3. In this regard, we have received suggestions from the stakeholders to consider minimum prescribed regulatory capital at the parent level rather than at the IBU level. The issue has been examined and the directions stand modified as follows:

4. The existing paragraph No.2.3 of Annex I of the aforesaid circular dated April 1, 2015 is amended to read as follows:

With a view to enabling IBUs to start their operations, the parent bank will be required to provide a minimum capital of USD 20 million or equivalent in any foreign currency to its IBU which should be maintained at all times. However, the minimum prescribed regulatory capital, including for the exposures of the IBU, shall be maintained on an on-going basis at the parent level.

5. The existing paragraph No.2.3 of Annex II of the aforesaid circular dated April 1, 2015 is amended to read as follows:

With a view to enabling IBUs to start their operations, the parent bank will be required to provide a minimum capital of USD 20 million or equivalent in any foreign currency to its IBU which should be maintained at all times. However, the minimum prescribed regulatory capital, including for the exposures of the IBU, shall be maintained on an on-going basis at the parent level as per regulations in the home country and the IBU shall submit a certificate to this effect obtained from the parent on a half-yearly basis to RBI (International Banking Division, DBR, CO, RBI). The parent bank will be required to provide a Letter of Comfort for extending financial assistance, as and when required, in the form of capital / liquidity support to IBU.

6. All other terms and conditions contained in the aforementioned circular remain unchanged.

7. An updated copy of the RBI circular on IBU dated April 01, 2015 incorporating the amendments made on January 07, 2016, November 10, 2016, April 10, 2017and May 17, 2018 is available on RBI’s website.

Full notification is available at here