Partially reverses restrictions put on banks’ proprietary tradingA foreign portfolio investor cannot take short position beyond $10 million at any time

The Reserve Bank of India (RBI), on Friday, allowed foreign investors to access the currency futures market for hedging their currency risks while also partially reversing the restrictions put last year on banks proprietary trading in the exchange traded currency futures.

The RBI said foreign portfolio investors could participate in the currency futures market by taking long or short position to the extent of $10 million without having to establish any underlying exposure.

“A foreign portfolio investor cannot take a short position beyond $10 million at any time and to take a long position beyond $10 million in any exchange, it will be required to have an underlying exposure,’’ the central bank said in the release.

The central bank said the responsibility of ensuring the existence of the underlying exposure shall rest with the foreign investor.

The RBI also partially reversed the restrictions put on banks’ proprietary trading, allowing them to take long or short position of up to $10 million without establishing any underlying exposure.

In July last, at the peak of the rupee crisis, the central bank had barred all banks from taking any proprietary positions in the currency futures market.

For banks, which want to take positions over $10 million will be required to establish the existence of an underlying, the central bank said in the release.

“In terms of the present regulatory framework, domestic participants in the currency futures and exchange traded options markets are not required to have any underlying exposure, while requirement of underlying is mandatory for taking a position in the over-the-counter derivatives markets,” the RBI said.

The Securities and Exchange Board of India has also issued a circular in this regard.

For participants, who are exporters, the eligible limit up to which they can take appropriate hedging positions in exchange-traded currency derivatives will be determined as higher of the average of the last three years’ export turnover, or the previous year’s export turnover and for importers, 50 per cent of the higher of the average of their last three years’ import turnover or the previous year’s turnover.

The participants would furnish to the trading member of the exchange, a certificate from their statutory auditors regarding the limit mentioned above along with an undertaking signed by the CFO.

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