Monday, June 27, 2016

writing of options against contracted exposures

It had been decided to permit resident exporters and importers to write (sell) standalone plain vanilla European call and put option contracts against their contracted exposure, to any AD Cat-I bank in India. The amended guidelines are as given below:   

Writing of Covered Call and Put Currency Option contracts by Indian exporters and importers

1.    Participants

a.     Market-makers: AD Category-I banks in India who have Reserve Bank’s approval to run cross-currency and foreign currency-Indian Rupee options books.

b.    Users: Listed companies and their subsidiaries/joint ventures/associates having common treasury and consolidated balance sheet or unlisted companies with a minimum net worth of Rs. 200 crore provided appropriate disclosures are made in the financial statements.

2.    Product

a.     Covered Call: A resident exporter may write (sell) a standalone plain vanilla European call option contract to an AD Category-I bank in India against the cover of contracted exposure arising out of exports of goods and services from India.
b.    Covered Put: A resident importer may write (sell) a standalone plain vanilla European put option contract to an AD Category-I bank in India against the cover of contracted exposure arising out of imports of goods and services into India.
c.     The use of Covered option shall not be considered as a hedging strategy.
d.    Covered call and covered put options shall be treated as structured derivative products.

3.    Operational guidelines, terms and conditions

a.     All the guidelines governing derivative products in general and structured products in particular of the circular will apply, mutatis mutandis, to covered options.
b.    AD Category-I banks may enter into covered options with their exporter or importer constituents only after obtaining specific approval and as per the terms and conditions on running Cross Currency and Foreign Currency – INR options book.
c.     The responsibility of assessing the strength of risk management systems, financial soundness of the option writer shall rest with the concerned AD Cat-I bank. AD Category I banks may stipulate safeguards, such as, continuous profitability, higher net worth, turnover, etc. depending on the scale of forex operations and risk profile of the option writers.
d.    Covered options may be written against either a portion or the full value of the underlying.
e.     AD Cat-I banks shall treat the exposures against which a covered option has been written as an “unhedged exposure”.
f.      Covered option contracts may be written for a period up to the maturity of the underlying subject to a maximum maturity period of 12 month.
g.    Covered options may be freely cancelled and rebooked subject to the verification of the underlying by the AD Cat-I bank concerned.
h.    For eligible underlying contracted exposures, the option seller may write the covered option either as a single FCY-INR option or as separate options for the FCY-USD and USD-INR legs.
i.      The operational guidelines and terms and conditions as laid down under “Contracted Exposures” – Forward Foreign Exchange Contracts, Cross Currency Options (not involving Rupee) and Foreign Currency-INR Options shall be applicable to covered options to the extent relevant.
j.      Except as mentioned in these guidelines, covered options shall not be undertaken in combination with any other derivative or cash instrument.
k.    As provided under Comprehensive Guidelines on Derivatives,  authorised dealers may maintain cash margin / liquid collateral in respect of covered options sold to them by exporters and importers, if necessary.
l.      AD Cat-I banks entering into covered options with their constituents may report the same to CCIL’s reporting platform for OTC foreign exchange derivatives.

4.    In addition to the above, “General Instructions for OTC forex derivative contracts entered by Residents in India,” shall be applicable, mutatis mutandis, to covered options.

Based on RBI circular dated 23/06/2016/ For further clarification please refer ………..Poppy