Authorised dealers can offer foreign exchange derivative contracts up to $1 million to users – retail or non-retail – to hedge their exposure to the exchange rate of Rupee against a foreign currency on account of current and capital account transactions permissible under Foreign Exchange Management Act (FEMA), 1999, according to the Reserve Bank of India’s draft circular on Hedging of foreign exchange risk by Residents and Non-Residents.
Non-retail users include insurance companies, mutual funds, pension funds and other collective investment schemes, entities regulated by RBI, financial institutions, companies (meeting any one criteria: listed on an exchange in India or any Financial Action Task Force jurisdiction; networth of Rs 200 crore or its equivalent; the notional amount of the user’s outstanding foreign exchange derivatives exceeded $250 million or equivalent at any point in each of the previous four quarters). Non-retail users will also include foreign banks, central banks, international and supranational institutions and similar international organisations; and foreign institutions whose main activity is to invest /transact in financial instruments.
Any user who is otherwise eligible to be classified as a non-retail user shall have the option to get classified as a retail user. Eligible products in the case of non-retail users will be any derivative contract, which the authorised dealer (AD) can price and value independently and is approved by the board of the dealer, provided that the same is not a leveraged derivative.
Eligible products in the case of retail users will be forwards, purchase of call and put options (Only European options), purchase of call and put spreads, swaps. While offering contracts involving Rupee, and during the life of such contracts, ADs have to ensure that: the contract is for the purpose of hedging; the notional and tenor of the contract does not exceed the value and tenor of the exposure; the same exposure has not been hedged using any another derivative contract.