What changed
The circular consolidates existing instructions on risk management and inter-bank dealings into a single document, replacing earlier circulars. It introduces a sunset clause, making the circular valid only until July 1, 2012, after which an updated version will replace it. Key operational guidelines include a 15-day window for submitting underlying documents and restrictions on booking contracts if documents are repeatedly late.
What it means for you
Banks must strictly enforce the 15-day document submission rule for derivative contracts, cancelling contracts and withholding exchange gains if deadlines are missed. Repeated non-compliance (more than three times in a financial year) will require upfront document submission for future contracts. This circular also clarifies that all underlying exposures must be verified, whether current or capital account transactions.
What you must do
- Verify underlying foreign currency exposure documents within 15 days of booking derivative contracts.
- Cancel contracts and deny exchange gains if documents are not submitted within 15 days.
- Track customer compliance: after three late submissions in a financial year, require documents upfront for all future contracts.
- Ensure statutory auditor quarterly certificates are obtained from the statutory auditor for derivative contracts.
- Prepare to replace this circular with the updated version by July 1, 2012.
Who it affects
AD Category I banks, Persons resident in India (other than AD Category I banks) using derivative contracts, Statutory auditors of entities booking derivative contracts
What happens if a customer fails to submit underlying documents within 15 days?
The contract must be cancelled, and any exchange gain should not be passed on to the customer. If this happens more than three times in a financial year, future contracts require upfront document submission.
Is this circular still valid?
No, it had a sunset clause and stood withdrawn on July 1, 2012. It was replaced by an updated Master Circular on the same subject.
What types of transactions are covered under this circular?
It covers foreign exchange derivative contracts, overseas commodity and freight hedging, rupee accounts of non-resident banks, and inter-bank foreign exchange dealings.