Skip to main content

What are guidelines on hedging risks in overseas markets?

Reserve Bank of India (RBI) has released guidelines on hedging of commodity price risk and freight risk in overseas markets.

What is hedging?

Hedging is the activity of undertaking a derivative transaction to reduce an identifiable and measurable risk. 

What is commodity price risk and freight risk?

  • Commodity price risk is the financial risk arising from fluctuations in the prices of commodities.
  • Freight risk is the financial risk arising from fluctuations in the freight charges.

Which entities are eligible for hedging commodity price risk and freight risk?

Residents other than individuals are eligible to hedge commodity price risk and freight risk through Authorised Dealer Category-I Banks.

How is exposure to commodity price risk and freight risk defined?

  • An eligible entity is said to have direct exposure to commodity price risk if –
    • It purchases / sells a commodity (in India or abroad) whose price is fixed by reference to an international benchmark; or
    • It purchases / sells a product (in India or abroad) which contains a commodity and the price of the product is linked to an international benchmark of the commodity.
  • An eligible entity is said to have indirect exposure to commodity price risk if it purchases / sells a product (in India or abroad) which contains the commodity and the price of the product is not linked to an international benchmark of the commodity.
  • An eligible entity is said to have exposure to freight risk if it is engaged in the business of refining oil or is engaged in the business of shipping.

Which commodities are eligible for hedging?

Commodities whose price risk may be hedged are –

  • In case of direct exposures to commodity price risk – All commodities (except Gems and Precious stones). 
  • In case of indirect exposures to commodity price risk – Aluminium, Copper, Lead, Zinc, Nickel, and Tin.

Which products are permitted for hedging?

Following products are permitted for hedging commodity price risk and freight risk –

  • Generic Products –
    • Futures and forwards
    • Vanilla options (call option and put option)
    • Swaps
  • Structured Products – 
    • Products which are combination of either cash instrument and one or more generic products
    • Products which are combination of two or more generic products

Structured products may be permitted to eligible entities who are –

  1. Listed on recognized domestic stock exchanges or 
  2. Fully owned subsidiaries of such entities or 
  3. Unlisted entities whose net worth is higher than INR 200 crore

How can commodity price risk and freight risk be hedged?

  • Eligible entities having exposure to commodity price risk for any eligible commodity may hedge such exposure in overseas markets using any of the permitted products.
  • Eligible entities having exposure to price risk of gold may hedge such exposure in the International Financial Services Centre (IFSC).
  • Eligible entities having exposure to freight risk may hedge such exposure in overseas markets by using any of the permitted products.

What are other guidelines for hedging transactions?

  • Banks are permitted to issue Standby Letters of Credit (SBLC) / Guarantees, for a maximum period of one year, on behalf of their clients in lieu of making a remittance of margin money for commodity hedging transactions entered into by their customers. 
  • Realisation and repatriation of foreign exchange due or accruing to an eligible entity resulting from permitted transactions shall be guided by the provisions of the Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015.
  • Banks shall submit a quarterly report to the Financial Markets Regulation Department, Reserve Bank of India (RBI) through Centralised Information Management System (CIMS). In case of no transactions, a “Nil” report shall be submitted by the bank.

What is the recent update in the guidelines?

(Updated on April 15, 2024)

Resident entities were permitted to hedge their exposure to price risk of gold on exchanges in the IFSC recognised by the International Financial Services Centres Authority (IFSCA). Resident entities have now been permitted to hedge their exposures to price risk of gold using over-the-counter (OTC) derivatives in the IFSC in addition to the derivatives on the exchanges in the IFSC.

What are the reporting requirements?

(Updated on December 27, 2024)

  • Banks shall report all OTC transactions in gold derivatives undertaken by them in domestic markets, IFSC and outside India to the trade repository (TR) of Clearing Corporation of India Ltd. (CCIL) with effect from February 01, 2025.
  • Banks shall report all OTC transactions in gold derivatives undertaken by their eligible customers / constituents in domestic markets and IFSC to the TR with effect from February 01, 2025.
  • Banks shall report all the aforesaid transactions undertaken by them or their eligible customers / constituents to the TR before 12:00 noon of the following business day.
  • As a one-time measure, banks shall report all matured and outstanding OTC transactions in gold derivatives undertaken by them in the domestic markets, IFSC and outside India and transactions undertaken by their eligible customers / constituents in domestic markets and IFSC from April 15, 2024 to the TR by February 28, 2025.


References

Reserve Bank of India. (2022, December 12). 'Hedging of Gold Price Risk in Overseas Markets'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12423&Mode=0

Reserve Bank of India. (2022, December 12). 'Master Direction – Foreign Exchange Management (Hedging of Commodity Price Risk and Freight Risk in Overseas Markets) Directions, 2022 (Updated as on April 15, 2024)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12427

Reserve Bank of India. (2024, April 15). 'Hedging of Gold Price Risk in Overseas Markets'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12662&Mode=0

Reserve Bank of India. (2024, December 27). 'Reporting Platform for transactions undertaken to hedge price risk of gold'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12757&Mode=0


Follow at - Telegram   Instagram   LinkedIn   Twitter

Labels:

Comments

Post a Comment

Popular Posts

Report of the Committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector

Reserve Bank of India (RBI) has released the report of the committee to develop a framework for responsible and ethical enablement of artificial intelligence (FREE-AI) in the financial sector. Committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector In the financial sector, Artificial Intelligence (AI) has the potential to unlock new forms of customer engagement, enable alternate approaches to credit assessment, risk monitoring, fraud detection, and offer new supervisory tools. At the same time, increased adoption of AI could lead to new risks like bias and lack of explainability, as well as amplifying existing challenges to data protection, cybersecurity, among others. To encourage the responsible and ethical adoption of AI in the financial sector, the committee to develop a Framework for Responsible and Ethical Enablement of Artificial Intelligence (FREE-AI) in the Financial Sector (Chairperson: Dr. Pushpak B...
Post a Comment
Read more

Lending against Gold and Silver collateral

Reserve Bank of India (RBI) has issued directions on lending against the collateral of gold and silver. To whom are the directions applicable? The directions are applicable to the following regulated entities (REs) – Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks, but excluding Payments Banks). Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs). Which loans are covered under the directions? The directions shall apply to all loans offered by an RE for the purpose of consumption or income generation (including farm credit) where eligible gold or silver collateral is accepted as a collateral security. What is eligible collateral? Eligible collateral means the collateral of jewellery, ornaments or coins made of gold or silver. A lender shall not grant any ad...
Post a Comment
Read more

All about RBI Integrated Ombudsman Scheme, 2021

Filed a complaint against a bank / financial institution but haven’t received a reply for more 30 days? Or received a reply but not satisfied with the resolution offered by the bank / financial institution? Or the complaint was rejected by the bank / financial institution? You can approach RBI Ombudsman under the RBI Integrated Ombudsman Scheme, 2021. What is RBI Integrated Ombudsman Scheme (RBI-IOS), 2021? RBI-IOS was launched on November 12, 2021, by integrating the existing 3 Ombudsman schemes of RBI. RBI-IOS adopts ‘One Nation One Ombudsman’ approach by making the RBI Ombudsman mechanism jurisdiction neutral. It provides cost-free redress of customer complaints involving deficiency in services rendered by entities regulated by RBI. Which schemes are integrated in RBI-IOS? RBI-IOS integrates following existing schemes of RBI – Schemes Powers derived from Entities covered Banking Ombudsman Scheme, 2006 Section 35A of BR Act, 1949 S...
Post a Comment
Read more

Investments in Debt Instruments by Non-residents

Reserve Bank of India (RBI) has issued directions on investments in debt instruments by non-residents. What are the channels for investments in debt instruments by non-residents? General Route – for investment in Government securities and corporate debt securities by Foreign Portfolio Investors (FPIs) subject to specified investment limits and macro-prudential limits. Voluntary Retention Route (VRR) – for investments in Government securities and corporate debt securities, free of certain macro-prudential limits applicable to FPI investments in debt markets under the General Route, by FPIs that commit to remain invested for a stipulated retention period. Fully Accessible Route (FAR) – for investments by non-residents in certain specified categories of Central Government securities (‘specified securities’) without any restriction. Scheme for Trading and Settlement of Sovereign Green Bonds (SGrBs) issued by the Central Government by eligible foreign investors in the International Finan...
Post a Comment
Read more

Continuous Clearing and Settlement on Realisation in Cheque Truncation System (CTS)

Reserve Bank of India (RBI) has issued direction on continuous clearing and settlement on realisation in Cheque Truncation System (CTS). What is Cheque Truncation System (CTS)? Cheque Truncation System (CTS) involves halting the physical movement of the cheque and its replacement by images of the instrument and the corresponding data contained in the MICR line.  In CTS, 3 images are taken of each cheque – front Gray Scale, front Black & White and back Black & White. MICR (Magnetic Ink Character Recognition) is a 9-digit code printed at the bottom of cheques using magnetic ink – first 3 digits indicate City Code, middle 3 digits indicate Bank Code and the last 3 digits indicate Bank Branch Code. Only CTS-2010 standards compliant instruments can be presented for clearing through CTS. The presenting banks which truncates the cheques need to preserve the physical instruments for 10 years. From when will the continuous clearing and settlement on realisation in CTS be implemented...
Post a Comment
Read more