sign in sign up
<<
Home , Indian rupee

28 January 2020

EY Regulatory Alert

Introduction of Derivatives at International Financial Services Centre

Regulatory Alerts cover Executive summary significant regulatory news, developments and changes in The Foreign Exchange Management (International Financial Services Centre) legislation that affect Indian Regulations, 2015 (2015 Regulations), permit a financial institution or a branch businesses. They act as technical of a financial institution setup in an International Financial Services Centre (IFSC) summaries to keep you on top of to conduct business in foreign as may be determined by a regulatory the latest regulatory issues. For authority governing such financial institution. more information, please contact your EY advisor. The Reserve Bank of (RBI) has recently amended the provisions of the 2015 Regulations permitting a financial institution or branch of a financial institution to conduct business in Indian in an IFSC. The amendment comes into effect from 7 January 2020.

Further to the above amendment, the RBI has now, vide a Circular1 dated 20 January 2020 (Circular), allowed the trading of Rupee Derivatives (with settlement in foreign currency) in IFSCs starting with Exchange Traded Currency Derivatives. This alert summarizes the key features of this Circular.

1 RBI/2019-20/145 A.P. (DIR Series) Circular No. 17

Page 2

Background Rupees in the IFSC. The amendment comes into effect from 7 January 2020.

► As per the Foreign Exchange Management ► Further to the above amendment, the RBI has (International Financial Services Centre) now, vide a Circular1 dated 20 January 2020 Regulations, 2015 (2015 Regulations), a (Circular), allowed Rupee Derivatives (with financial institution or a branch of a financial settlement in foreign currency) to be traded in institution set-up in an International Financial the IFSC starting with Exchange Traded Services Centre (IFSC) is permitted to conduct Currency Derivatives. business in foreign currency as may be

determined by a regulatory authority governing ► The Circular inter alia deals with the following: such financial institution. - Currency Futures in International Financial ► International Finance Tech City (GIFT Service Centre (Reserve Bank) Directions, City) is India’s first IFSC developed near the cities 2020 (Currency Futures Directions) of Ahmedabad and Gandhinagar in Gujarat, as a - Currency Options in International Financial global financial and information technology Service Centre (Reserve Bank) Directions, services hub, designed to be at, or above par with 2020 (Currency Options Directions) globally benchmarked financial centres.

► This alert contains the key features of the ► The Task Force on Offshore Rupee Markets Circular. chaired by former RBI Deputy Governor, Smt , in its report dated Currency Futures Directions 30 July 2019, had recommended measures to

incentivize non-residents to access the onshore Permission . One of the recommendations included allowing Rupee ► Currency Futures contracts2 are permitted in Derivatives (with settlement in foreign currency) any involving the Indian Rupee to be traded in the IFSC. or otherwise.

► Accepting the above recommendation, the ► Persons resident in India3 as defined under (RBI) has recently the Foreign Exchange Management Act, amended the provisions of the 2015 Regulations 1999 (FEMA), unless specifically permitted permitting a financial institution or branch of a by RBI, shall not be eligible to undertake financial institution to conduct business in Indian Currency Futures contracts.

2 ‘Currency Futures contract’ means a standardised intention to stay outside India for an foreign exchange derivative contract traded on a uncertain period; recognised stock exchange in IFSCs to buy or sell one currency against another on a specified future date, at a (B) A person who has come to or stays in India, price specified on the date of contract, but does not in either case, otherwise than; include a forward contract. (a) For or on taking up employment in India, or 3 ‘Person resident in India’ means: (b) For carrying on in India a business or (i) A person residing in India for more than one vocation in India, or hundred and eighty-two days during the course of (c) For any other purpose, in such the preceding financial year but does not include: circumstances as would indicate his intention to stay in India for an (A) A person who has gone out of India or who uncertain period; stays outside India, in either case: (a) For or on taking up employment outside (ii) any person or body corporate registered or India, or incorporated in India, (b) For carrying on outside India a business (iii) an office, branch or agency in India owned or or vocation outside India, or controlled by a person resident outside India, (c) For any other purpose, in such (iv) an office, branch or agency outside India owned circumstances as would indicate his or controlled by a person resident in India.

Page 3

► Persons resident outside India4 as defined Risk management measures under FEMA shall be eligible to undertake Currency Futures contracts. ► The trading of Currency Futures shall be subject to maintaining initial, extreme loss Features of Currency Futures and calendar spread margins and the Clearing Corporation/ Clearing House of the ► All Currency Futures contracts shall be settled recognised stock exchange shall ensure in a currency other than the Indian Rupee. maintenance of such margins by the participants on the basis of the guidelines ► The settlement price for Currency Futures issued by SEBI from time-to-time. contracts involving the Indian Rupee shall be the FBIL Reference rate5, where available, on Currency Option Directions the last trading day of the contract. Permission For Currency Futures contracts involving the Indian Rupee, where FBIL reference rates are ► Currency Option contracts6 are permitted in not available, and for other currency pairs, the any currency pair involving the Indian Rupee mechanism for arriving at the settlement price or otherwise. shall be decided by the recognized stock exchange where these futures will be traded in ► Persons resident outside India as defined consultation with the Securities and Exchange under FEMA shall be eligible to undertake Board of India (SEBI). Currency Option contracts.

► The size, maturity and other specifications of ► Persons resident in India as defined under the Currency Futures contracts shall be FEMA, unless specifically permitted by RBI, decided by the recognized stock exchange shall not be eligible to undertake Currency mentioned above, in consultation with the Option contracts. SEBI. Features of Currency Options Position limits ► All Currency Option contracts shall be settled ► The position limits for various classes of in a currency other than the Indian Rupee. participants in the currency futures market shall be subject to guidelines issued by the ► The settlement price for Currency Option SEBI. contracts involving the Indian Rupee shall be the FBIL Reference rate5, where available, on ► IFSC Banking Units shall operate within the expiry date of the contract. prudential limits as laid down in the instructions issued by the RBI.

4 ‘Person resident outside India’ means a person who is of the option has the right but not the obligation to not resident in India. purchase (call option)/ sell (put option) and the seller (or writer) of the option agrees to sell (call option)/ 5 ‘FBIL Reference rate’ means the rates of currency pairs purchase (put option) an agreed amount of a specified computed and published on a daily basis, on all currency at a price agreed in advance and denominated business days, by Financial Benchmarks India Private in another currency (known as the strike price) on a Limited. specified date in the future.

6 ‘Currency Options contract’ means a standardised foreign exchange derivative contract traded on a recognised stock exchange in IFSCs where the purchaser

Page 4

For Currency Option contracts involving the Indian Rupee where FBIL reference rates are Comments not available, and for other currency pairs, the mechanism for arriving at the settlement price Stock exchanges in the IFSC are presently shall be decided by the recognized stock permitted to offer a diversified range of products spanning various asset classes which include exchange in consultation with the SEBI. derivatives on Indian indices, derivatives on Indian stocks, derivatives on foreign stocks, cross ► The size, maturity and other specifications of currency derivatives, commodity futures on gold, the Currency Option contracts shall be decided silver and base metals, etc. Also, while listing and by the recognized stock exchange in trading of the Rupee denominated Bonds (popularly consultation with the SEBI. known as Masala Bonds) is permitted in the IFSC, hedging Rupee exchange rate risk on it is not

permitted. Position limits Further, the size of the offshore Rupee derivative ► The position limits for various classes of market and its present rate of growth pose a participants in the Currency Option market significant challenge to the efficiency of price shall be subject to guidelines issued by the discovery as well as the effectiveness of exchange rate management policy. The possibility that the SEBI. exchange rate of the Rupee, not a fully convertible currency, being materially determined by ► IFSC Banking Units shall operate within transactions largely outside the legal and prudential limits as laid down in the regulatory influence of India maybe a matter of instructions issued by the RBI. concern.

Given the favorable tax regime of IFSC and by Risk management measures virtue of the IFSC units being outside the capital controls under FEMA, the introduction of Rupee ► The trading of Currency Options shall be derivatives in IFSC may bring volumes and price subject to maintaining initial, extreme loss and discovery of underlying instruments to India. calendar spread margins and the Clearing Corporation/ Clearing House of the recognised stock exchange shall ensure maintenance of such margins by the participants on the basis of the guidelines issued by the SEBI from time to time.

Page 5

Our offices

Ernst & Young LLP

EY | Assurance | Tax | Transactions | Advisory Ahmedabad Hyderabad

22nd Floor, B Wing, Privilon, Oval Office, 18, iLabs Centre Hitech

Ambli BRT Road, Behind Iskcon Temple, Off City, Madhapur Hyderabad - 500 081 About EY SG Highway, Tel: + 91 40 6736 2000 EY is a global leader in assurance, tax, transaction Ahmedabad - 380 015 and advisory services. The insights and quality Tel: + 91 79 6608 3800 services we deliver help build trust and confidence Jamshedpur in the capital markets and in economies the world 1st Floor, Shantiniketan Building Bengaluru over. We develop outstanding leaders who team to Holding No. 1, SB Shop Area Bistupur, 6th, 12th & 13th floor deliver on our promises to all of our stakeholders. In Jamshedpur – 831 001 “UB City”, Canberra Block so doing, we play a critical role in building a better Tel: +91 657 663 1000 No.24 Vittal Mallya Road working world for our people, for our clients and for Bengaluru - 560 001 our communities. Tel: + 91 80 6727 5000 Kochi EY refers to the global organization, and may refer 9th Floor, ABAD Nucleus Ground Floor, ‘A’ wing to one or more, of the member firms of Ernst & NH-49, Maradu PO Young Global Limited, each of which is a separate Divyasree Chambers Kochi - 682 304 legal entity. Ernst & Young Global Limited, a UK # 11, O’Shaughnessy Road Tel: + 91 484 304 4000 company limited by guarantee, does not provide Langford Gardens services to clients. For more information about our Bengaluru - 560 025 organization, please visit ey.com. Tel: + 91 80 6727 5000 22 Camac Street 3rd Ernst & Young LLP is one of the Indian client serving Chandigarh Floor, Block ‘C’ Kolkata - member firms of EYGM Limited. For more information about 1st Floor, SCO: 166-167 700 016 our organization, please visit www.ey.com/in. Tel: + 91 33 6615 3400 Sector 9-C, Madhya Marg Ernst & Young LLP is a Limited Liability Partnership, Chandigarh - 160 009 registered under the Limited Liability Partnership Act, Tel: + 91 172 671 7800 2008 in India, having its registered office at 22 Camac Mumbai Street, 3rd Floor, Block C, Kolkata - 700016 Chennai 14th Floor, The Ruby 29 Senapati Bapat Marg Dadar © 2020 Ernst & Young LLP. Published in India. Tidel Park, 6th & 7th Floor All Rights Reserved. A Block, No.4, Rajiv Gandhi Salai (W), Mumbai - 400 028 Taramani, Chennai - 600 113 Tel: + 91 22 6192 0000 This publication contains information in summary form Tel: + 91 44 6654 8100 and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or

5th Floor, Block B-2 Nirlon the exercise of professional judgment. Neither Ernst & Delhi NCR Knowledge Park Young LLP nor any other member of the global Ernst & Golf View Corporate Tower B Off. Western Express Highway Young organization can accept any responsibility for loss Sector 42, Sector Road Goregaon (E) occasioned to any person acting or refraining from action Gurgaon - 122 002 as a result of any material in this publication. On any Mumbai - 400 063 specific matter, reference should be made to the Tel: + 91 124 443 4000 Tel: + 91 22 6192 0000 appropriate advisor.

3rd & 6th Floor, Worldmark-1 IGI Airport Hospitality District Pune Aerocity, - 110 037 C-401, 4th floor Panchshil Tel: + 91 11 4731 8000 Tech Park Yerwada (Near Don Bosco School) 4th & 5th Floor, Plot No 2B Pune - 411 006 Tower 2, Sector 126 Tel: + 91 20 4912 6000 NOIDA - 201 304 Gautam Budh Nagar, U.P. Tel: + 91 120 671 7000

Join India Tax Insights from EY on Download the EY India Tax Insights App Logo