Brokerages are receiving follow-up calls from leading exchanges asking them to ensure that their clients trading in currency derivatives are in line with the Reserve Bank of India's directives, which come into effect from April 5.
The National Stock Exchange (NSE) and BSE issued circulars to brokerages on April 1. On January 5, the RBI issued circular Risk Management and Inter-Bank Dealings- Hedging of foreign exchange risk.
The central bank directed stock exchanges to inform users that they can trade in currency derivatives up to $100 million equivalent across all currency pairs only if they can ensure the existence of a valid underlying contracted exposure.
If users want to trade beyond the limit, because they have such an exposure, they have they will need to route their trades through an authorised dealer or custodian and exchanges have to make this facility available.
Also read: Popular FX derivatives market faces crushing blow in India
Contracted exposure’ means currency risk arising on account of current or capital account transactions permissible under the FEMA, 1999 or any rules or regulations made thereunder.
Market insiders Moneycontrol spoke to said they were hoping that the April 5 deadline would be extended but since it didn't happen, exchanges are asking brokerages to fall in line quickly.
A broker Moneycontrol spoke to said they were planning to send out notifications to the clients, saying they either declare that they have an underlying exposure or get a certificate from their auditor to do the same. Otherwise the brokerages will square off their currency derivative position on April 5.
On April 2, Zerodha, the country's biggest stock broker, shared a PDF of a self-declaration form for its client traders. The traders have to declare that they have engaged in currency trading through the brokerage and that they wish to continue the same.
They have to ensure that they maintain their position size within the $100- million limit and their positions are in compliance with the RBI directive.
The trader must agree to provide, upon request from the brokerage, the exchanges or the central bank sufficient evidence of the underlying exposure related to their currency derivative contracts.
The declaration form also indemnifies the brokerage from any liabilities, losses, damages or costs that may arise in the event the trader is unable to produce the necessary evidence.
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