What changed
RBI permitted trading of plain vanilla currency options on spot USD-INR rate on recognised stock exchanges for residents, effective July 30, 2010. This follows the Monetary Policy Statement 2010-11 announcement and supplements the existing currency futures framework. The Exchange Traded Currency Options (Reserve Bank) Directions, 2010, along with amendments to FEMA regulations, govern this market.
What it means for you
Banks and their clients now have a new exchange-traded hedging instrument—currency options—to manage USD-INR exposure, offering more flexibility than futures. AD Category-I banks must ensure compliance with RBI and SEBI directions, including participant eligibility and contract features. This deepens the forex derivatives market and may increase trading volumes on stock exchanges.
What you must do
- Review and implement the Exchange Traded Currency Options (Reserve Bank) Directions, 2010 for USD-INR options trading.
- Ensure only 'persons resident in India' are permitted to trade, and verify compliance with hedging or other participation rules.
- Coordinate with SEBI-recognised stock exchanges to facilitate smooth introduction of currency options on their platforms.
- Update internal risk management and reporting systems to handle currency options alongside existing futures.
- Train staff on the new product features, including standardized contract specifications and regulatory requirements.
Who it affects
AD Category-I banks, Resident individuals and corporates hedging forex exposure, SEBI-recognised stock exchanges offering currency derivatives, Clearing corporations and market intermediaries
What currency pairs are allowed for these options?
Initially, only USD-INR spot rate is permitted. Other currency pairs may be allowed by RBI in the future.
Who can trade these currency options?
Only persons resident in India as defined under FEMA, 1999. They can use options for hedging forex exposure or otherwise, as per the Directions.
What are the key features of these options?
They are standardized, exchange-traded plain vanilla European call and put options on spot USD-INR, with a contract size of USD 1000, premium quoted in Rupees, maturity not exceeding twelve months, cash settlement in Indian Rupees, and settlement price based on RBI’s Reference Rate.