Revised RBI Guidelines on FX

hedging – Underlying scenarios

Private & Confidential – For Internal Circulation only

 New Circular rollout

The Reserve Bank of India has issued guidelines captioned ‘Risk Management and Inter-
bank Dealings – Hedging of Foreign Exchange Risk’ (‘FX Hedging Guidelines’), effective
from 01 Sept,2020.

This presentation covers the forms of underlying which can be used to hedge the FX
exposure under the revised guidelines.

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 Contracted Exposure (CE)
An exposure to the exchange rate of INR against a foreign currency on account of
current and capital account transactions, permissible under FEMA guidelines, which
have already been entered into.
While offering derivative contracts involving INR under contracted exposure:
Purpose Contract is for the purpose of hedging (i.e. to offset the impact of underlying exposure).

Notional and Tenor Notional and tenor of the contract doesn’t exceed the underlying exposure.
Same exposure has not been hedged using any other derivative contract. Bank may demand an
Over hedging
undertaking with the same declaration from time to time.

• In case the exposure ceases to exist, in full or in part, the hedge to be appropriately adjusted
unless the original derivative contract is assigned to another unhedged exposure
• In cases where the value of the exposure falls below the notional of the derivative, the
Alteration in value of exposure
notional should be suitably adjusted. However for capital account transactions where such
divergence is on account of change in market value of exposure the contract can continue till
the maturity.
Where the value of the exposure is not ascertainable with the certainty, derivative contracts
Reasonable estimate for eg.
may be booked on the basis of reasonable estimates subject to periodic review and suitable
MSA’s / MPA’s
documentation (MSA declaration & other documents as required by Bank in support of it).

• Evidence of underlying contracts shall be submitted within 15 calendar days of the trade date to avoid cancelation of the
contract. In case of any such cancelation due to delay in submission, gains shall not be passed and any losses shall be recovered.
• All contracts under contracted exposures are allowed to be freely cancelled and rebooked.

• Unlike current guideline,

 Underlying may be obtained in either physical or electronic form through an acceptable
medium including but not limited to emails.

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 Anticipated Exposure (AE)
An exposure to the exchange rate of INR against a foreign currency on account of
current and capital account transactions, permissible under FEMA guidelines,
which is expected to be entered into future
• At the time of contract booking under anticipated exposure -
• Relevant information can be sought :
• Basic details of underlying (Capital account/Current Account)
• For hedging of Capital Account exposure – Information on instrument, expected date of agreement/remittance, expected deal
value, Probable parties
• Each contract booked (first time) will be assigned a unique reference number (such as AE 1 or AE2) and a booking limit at
the contract level . Any further cancellation and rebooking will be tracked at the contract level through this AE reference
no and booking amount at any point of time can not exceed the assigned booking limit.
• In case the booking is against a previously hedged AE ID/Unique Reference, the customer will provide the AE ID/unique reference
either at the time of deal booking or later within 15 days to link the subsequent hedges with the previous Contract/AE ID.

• All contracts under AE are allowed to be freely cancelled and rebooked. However, net gains on the contracts
cancelled shall be passed only at the time of the cash flow of the anticipated transaction
• Netting of gain with losses will be allowed at a contract level only.
• Only gains crystallised on or before the loss can be considered for netting with losses at contract level i.e. within same AE
reference no.
• For gains to be passed (on pro-rata basis or fully) either actual cash flow has taken place with the Bank or evidenced to
the Bank through requisite documentary proof in a timely manner.
• Gains cannot be passed as an offset to losses already debited to account on a prior date.
• Unlike Past Performance (PP),
 AE contract limit is calculated on outstanding basis and not on actual booking basis.
 AE allows both Current Account and Capital Account exposure hedging.
 AE doesn’t have a restriction of 75% of limit on cancelation. All contracts are freely
cancellable and rebooked.
 Netting of gains is allowed at contract level only and gains to be passed only at the
time of actual cash flow taking place.

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 Anticipated Exposure : deal booking scenarios (day-wise)
Contract booking details AE limit calculation

Date of Nature of Maturity of Deal booking Contract AE Maximum Current

booking booking Contract booked Contract remarks Tagging booking Limit Available limit

01-Sep-20 Fresh Buy USD 1 mn ag INR @ XXXX 31-Oct-20 New AE AE-1 USD 1 mn Nil

01-Sep-20 Fresh Buy EUR 2 mn ag INR @ XXXX 31-Oct-20 New AE AE-2 EUR 2 mn Nil

02-Sep-20 Cancellation Sell USD 0.5 mn ag INR @ XXXX 31-Oct-20 Knock-off from AE-1 AE-1 USD 1 mn USD 0.5 mn

02-Sep-20 Cancellation Sell EUR 0.75 mn ag INR @ XXXX 31-Oct-20 Knock-off from AE-2 AE-2 EUR 2 mn EUR 1.25 mn

NOT ALLOWED – as booking amount available

under AE-1 is USD 0.5 mn only. Alternatively,
Option 1: You may book two separate deals, USD
0.5 mn under AE-1 and 0.50 mn under a new AE
03-Sep-20 Fresh Buy USD 1 mn ag INR @ XXXX 30-Nov-20 Existing AE-1 Option 2: Book USD 1.00 mn under a new AE

03-Sep-20 Fresh Buy USD 0.5 mn ag INR @ XXXX 30-Nov-20 Existing AE-1 AE-1 USD 1 mn Nil

03-Sep-20 Fresh Buy USD 0.5 mn ag INR @ XXXX 30-Nov-20 New AE AE -3 USD 0.5 mn Nil

03-Sep-20 Fresh Buy USD 1.0 mn ag INR @ XXXX 30-Nov-20 New AE AE -4 USD 1.0 mn Nil

 First time any contract booked will be assigned a unique reference number and a booking limit same as
booked deal amount.
 Further cancellation and rebooking will be tracked (at a contract level) through this reference number &
booking amount under the AE can never exceed the assigned booking limit.
 Any rebooking under the same AE can be allowed for a tenor higher than the original maturity of the first
AE contract

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 Anticipated Exposure : Directions for Gain/Loss settlement
• Netting is allowed only within the same AE reference number.

• For the purpose of arriving at the Netting, date of crystallization (of such gain or loss) with in same AE shall
matter. Any gain crystallization on or prior to loss crystallization is eligible for netting.

• Any resulting net gain (post netting) will be withheld till evidencing of cash flows within a reasonable time
from maturity date of contract. Withheld gains however will continue to be eligible for further adjustment
with subsequent gains/losses within the same AE.
Refer slide 7 for related scenarios

• Loss on contracts which has not been completely netted off against gains would be debited on the due date.
However any loss payable beyond 3 months is to be debited on an upfront basis as per extant prudent
guidelines. Any gain eligible for netting may also be adjusted with the loss on an upfront basis.

• Gains are allowed to be passed on a pro-rata basis in case of part delivery of cash flows.

• In case of multiple gains parked at different dates, the gains can be PVed as per requirement to ascertain the
Net gain pool. Gain pay out will always be done on a FIFO basis.
Refer slide 8 for related scenarios

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 Anticipated Exposure : Gain/Loss scenarios (1/2)
Crystallisation of Gain is earlier than Loss – Net Loss Crystallisation of Gain is earlier than Loss – Net Gain
Cancelation/ Settlement Settlement Cancelation/ Settlement Settlement
Crystallisation date Type date INR Amount Crystallisation date Type date INR Amount
AE-1 AE-1 01-Sep-20 Gain crystallised 15-Sep-20 100,000
01-Sep-20 Gain crystallised 15-Sep-20 50,000
AE-1 AE-1 05-Sep-20 Loss crystallised 30-Sep-20 -50,000
05-Sep-20 Loss crystallised 30-Sep-20 -100,000
Gains of INR 50,000 crystallised on 01-Sep-20 and due on 15-Sep-20 / Gains of INR 100,000 crystallised on 01-Sep-20 and due on 15-Sep-20 / Loss
Loss of INR 100,000 crystallised on 05-Sep-20 and due on 30-Sep-20. of INR 50,000 crystallised on 05-Sep-20 and due on 30-Sep-20.
Under the same AE, gains can be netted off with losses, if gains Under the same AE, gains can be netted off with losses, if gains crystallization
crystallization date is on or prior to the loss crystallisation date. date is on or prior to the loss crystallisation date.
So here gain of INR 50,000 will be adjusted with the loss of INR 100,000 So here gain of INR 100,000 will be adjusted with the loss of INR 50,000 and
and the net loss of INR 50,000 will be payable by you on 30-Sep-20 the net gain pool of INR 50,000 will be withheld for future netting under the
same contract, if any. Net gains are passed on once the actual cash flow has
taken place with the Bank or evidenced to the Bank within a reasonable time
from maturity date of contract.

Crystallisation of Loss is earlier than Gain Crystallisation of Gain is earlier than Loss but Gain settlement date is later
Cancelation/ Settlement Settlement Cancelation/ Settlement
Crystallisation date Type date INR Amount Crystallisation date Settlement Type date INR Amount
AE-1 01-Sep-20 Loss crystallised 30-Sep-20 -100,000 AE-1 01-Sep-20 Gain crystallised 30-Sep-20 50,000
AE-1 05-Sep-20 Gain crystallised 15-Sep-20 50,000 AE-1 05-Sep-20 Loss crystallised 15-Sep-20 -100,000
Loss of INR 100,000 crystallised on 01-Sep-20 and due on 30-Sep-20 / Gains of INR 50,000 crystallised on 01-Sep-20 and due on 30-Sep-20 / Loss of
Gain of INR 50,000 crystallised on 05-Sep-20 and due on 15-Sep-20. INR 100,000 crystallised on 05-Sep-20 and due on 15-Sep-20.
Under the same AE, gains can NOT be netted off with losses if gains Under the same AE, gains can be netted off with losses, if gains crystallization
crystallization date is after the loss crystallisation date. date is on or prior to the loss crystallisation date.
So here you to pay INR 100,000 of loss on 30-Sep-20. Gain pool of INR However, the loss settlement date here is prior to gain so you can give us a
50,000 will be withheld for future netting under the same contract, if request letter to PV gains to 15-Sep-20 and adjust with losses and you can
any. Net gains are passed on once the actual cash flow has taken place pay the Net losses on 15- Sep-20
with the Bank or evidenced to the Bank within a reasonable time from
maturity date of contract.

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 Anticipated Exposure : Gain/Loss scenarios (2/2)
Loss is payable beyond 3 months – Net Loss Loss is payable beyond 3 months – Net Gain
Cancelation/ Settlement Settlement Cancelation/ Settlement Settlement
Crystallisation date Type date INR Amount Crystallisation date Type date INR Amount
AE-1 01-Sep-20 Gain crystallised 30-Sep-20 50,000 AE-1 01-Sep-20 Gain crystallised 30-Sep-20 500,000
AE-1 05-Sep-20 Loss crystallised 31-Jan-21 -500,000 AE-1 05-Sep-20 Loss crystallised 31-Jan-21 -50,000
Gains of INR 50,000 crystallised on 01-Sep-20 and due on 30-Sep-20 / Loss of INR Gains of INR 500,000 crystallised on 01-Sep-20 and due on 30-Sep-20 / Loss
500,000 crystallised on 05-Sep-20 and due on 31-Jan-21. of INR 50,000 crystallised on 05-Sep-20 and due on 31-Jan-21.
Under the same AE, gains can be netted off with losses, if gains crystallization date is Under the same AE, gains can be netted off with losses, if gains crystallization
on or prior to the loss crystallisation date. Further, any loss payable beyond 3 date is on or prior to the loss crystallisation date. Further, any loss payable
months from cancelation is to be necessarily settled on upfront basis. beyond 3 months from cancelation is to be necessarily settled on upfront
In this scenario, we can PV both the gains and losses and the net loss amount basis.
thereby arrived at is to be settled on an upfront basis. In this scenario, we can PV both the gains and losses and the net gain amount
thereby arrived at will be withheld for future netting under the same
contract, if any. Net gains are passed on once the actual cash flow has taken
Pro-rata settlement
place with the Bank or evidenced to the Bank within a reasonable time from
Cancelation/ Settleme INR Contract maturity date of contract.
Crystallisation date Settlement Type nt date Amount Notional
AE-1 USD 1.0 mn Gains and Losses under different AE
01-Sep-20 Gain crystallised 20-Sep-20 50,000
Cancelation/ Settlement Settlement
AE-1 05-Sep-20 Gain crystallised 30-Sep-20 50,000 USD 1.0 mn
Crystallisation date Type date INR Amount
AE-1 15-Oct-20 Gain crystallised 31-Dec-20 100,000 USD 0.5 mn AE-1 Gain
Settlement of gains is permitted on a pro-rata basis in case of part delivery. 01-Sep-20 crystallised 30-Sep-20 50,000
Here you book a contract for USD 1.0 mn for 20-Sep-20 maturity and cancel it on 01-Sep- AE-2 05-Sep-20 Loss crystallised 15-Sep-20 -100,000
20. Further you book USD 1.0 mn for 30-Sep-20 maturity and cancel it on 05-Sep-20. Gains of INR 50,000 crystallised on 01-Sep-20 and due on 30-Sep-20 under
1. Now assuming you have evidenced 40% of cash flow (USD 0.40 mn) on 1-Oct-20, you AE-1/ Loss of INR 100,000 crystallised on 05-Sep-20 and due on 15-Sep-20
can receive 40% of net gain pool amount (i.e. INR 40,000) and the balance INR 60,000 will under AE-2.
be retained in the net gain pool which can be paid on delivery of balance USD 0.60 mn. Netting is NOT allowed within different AE. So here you to pay INR 100,000
2. Assuming you book another USD 0.5 mn for 31-Dec-20 and cancel it on 15-Oct-20 with of loss on 15-Sep-20 under AE-2. Gain pool of INR 50,000 under AE-1 will be
gain of INR 100,000 due on 31-Dec-20. So net gain pool is now (INR 60,000+PV of INR withheld for future netting under the same contract, if any. Net gains are
100,00). passed on once the actual cash flow has taken place with the Bank or
3. Now say on 1-Nov-20 you evidence delivery of another 50% of remaining cash flows evidenced to the Bank within a reasonable time from maturity date of
(i.e. USD 0.3 mn) then 50% of this net pool gain will be paid on a FIFO basis (i.e. Sep contract.
month gains will be utilised first followed by PV of Dec month gains to the extent needed)
and balance is withheld for future deliveries.

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 USD 10 million facility
It is a special window under CE/AE to allow to hedge capital/current account
exposures (only in INR) up to USD 10 million equivalent notional outstating at any
point in time across Banks without the need to establish underlying.
• It is not a separate facility but a special window for hedging limited exposure. All booked contracts to be
specified as CE/AE at the time of booking and contract booking rules for CE/AE will be applicable.
• One-time declaration is to be provided stating that the hedging does not/will not exceed USD 10 million at any
point in time across Banks.
• All contracts under this window are freely cancelled and rebooked.
• In case of contracts booked under CE, any gains/losses may be freely passed/recovered.
• In case of contracts booked under AE, losses are to be recovered, however, gains are to be passed only once actual cash
flow has taken place with the Bank or evidenced through documents.
• USD equivalent value for non-USD/INR contracts (e.g. EUR/INR) will be ascertained as per Bank’s internal policy.

What if the outstanding contract notional booked under this window ever crosses USD 10 mn equivalent?
• For all outstanding contracts booked under CE:
o Suitable underlying documents to be provided as per the norms laid down for CE.
o Time line for submission of underlying will be tracked from the date of breach of the USD 10 mn limit.
o Underlying should be valid on (or earlier) the date of booking of the respective outstanding contract.
o Subsequently all rules of CE will apply to contracts outstanding / new contracts booked under CE
• For all outstanding contracts booked under AE:
o Passing of net gains upon cancelation will be guided by the norms laid down for AE.
o Subsequently all rules of AE will apply to contract outstanding/new contract booked under AE
• It is only a one-time facility. Once the USD 10 million limit is breached, the entity is rendered ineligible for the
facility for any further contract booking in the same financial year. However, it can avail this facility again in the
next financial year if the outstanding contracts are within USD 10 million limit at that point in time.

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 Transition related

These regulations will come into effect from September 1, 2020

• Any hedge contract outstanding at the end of Aug 31, 2020 (booked under Contracted, Past performance, SHF
under the erstwhile guidelines) would continue to be governed by the regulatory guidelines existing at the time
of contract booking.
• Accordingly for such outstanding contracts, AD Bank shall seek associated documents/declarations as was
required under previous guideline such as Statutory auditor certificate for underlying against contracted
exposure and past performance till 31st August 2020..
• Any subsequent contracts booked on account of rollover or rebooking of these hedges shall be governed by the
guidelines/regulations which are applicable at the time of such rollover/rebooking.

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Thank You