Storage of Payment System Data

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It has been decided that:

·       All system providers shall ensure that the entire data relating to payment systems operated by them are stored in a system only in India. This data should include the full end-to-end transaction details / information collected / carried / processed as part of the message / payment instruction. Where there is a foreign leg to the transaction, the data can also be stored in the foreign country.

·       This instruction is to be complied within a period of six months and reported to the Reserve Bank by October 15, 2018.

·   System providers shall also submit the System Audit Report (SAR) duly approved by their board to RBI by Dec 31^st 2018. The audit should be conducted by CERT-IN empaneled auditors.

Based on RBI notification dated 6th April 2018. For any further clarification, please visit www.rbi.org.in ...............Poppy

Prohibition on dealing in Virtual Currencies (VCs)

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It has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs.

Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer or receipt of money in accounts relating to purchase or sale of VCs.

Regulated entities which already provide such services shall exit the relationship within three months from the date of this circular.

Based on RBI notification dated 6th April 2018. For any further clarification, please visit www.rbi.org.in ...............Poppy

Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks – Spreading of MTM losses and creation of Investment Fluctuation Reserve (IFR)

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It has been decided to grant banks the option to spread provisioning for mark to market (MTM) losses on investments held in AFS and HFT for the quarters ended December 31, 2017 and March 31, 2018. The provisioning may be spread equally over up to four quarters, commencing with the quarter in which the loss is incurred.

Banks choosing the above option shall make suitable disclosures in their notes to accounts/ quarterly results providing details of

·        the provisions for depreciation made during the quarter/year and

·        the balance required to be made in the remaining quarters.

All banks are advised to create an Investment Fluctuation Reserve (IFR) with effect from the year 2018-19, as under:

An amount not less than the lower of the following:

·        net profit on sale of investments during the year

·        net profit for the year less mandatory appropriations

shall be transferred to the IFR, until the amount is at least 2 % of the HFT and AFS portfolio, on a continuing basis. This should be achieved within a period of 3 years where feasable.

A bank may, at its discretion, draw down the balance available in IFR in excess of 2 %, for credit to the balance of profit/loss at the end of any accounting year. Where the balance in the IFR is less than 2 %, a draw down will be permitted subject to the following conditions:

·        The drawn down amount is used only for meeting the minimum CET1/Tier 1 capital requirements by way of appropriation to free reserves or reducing the balance of loss, and

·        The amount drawn down is not more than the extent, the MTM provisions made during the aforesaid year exceed the net profit on sale of investments during that year.

IFR shall be eligible for inclusion in Tier 2 capital.

Based on RBI notification dated 2^nd April 2018. For any further clarification, please visit www.rbi.org.in ...............Poppy

Agency commission payable to banks for operating Special Deposit Scheme

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It has been decided that henceforth agency commission claims on SDS related transactions (where mirror accounts are maintained in RBI) will be settled at Central Accounts Section (CAS), Nagpur, with immediate effect.

The claims are to be submitted on quarterly basis.

However, agency banks will continue to claim reimbursement of interest paid and withdrawal from SDS accounts from the respective Regional Offices of RBI in which the mirror accounts are maintained.

Based on RBI notification sated 15^th March 2018. For further clarity visit www.rbi.org.in .............. Poppy

Discontinuing Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits

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On a review of the prevailing guidelines on ‘External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency, it has been decided to discontinue the practice of issuing of LoUs and LoCs with immediate effect.

Letters of Credit and Bank Guarantees may continue to be issued as per prevailing guidelines.

The changes will be applicable from 13^th March 2018.

Based on RBI notification dated 13^th March 2018. In case you need further clarification, please visit www.rbi.org.in .................... Poppy

Hedging of Commodity Price Risk and Freight Risk in Overseas Markets

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The revised directions shall come into force from April 1, 2018.

However, residents hedging such risk based on the previous set of guidelines would be permitted to continue till June 30, 2018 or the last date specified in the approval, whichever is earlier.

All existing guidelines stand withdrawn as on April 1, 2018:

Definitions:

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

ii. Eligible entities refers to residents other than Individuals.

iii. An eligible entity will be said to have direct exposure to commodity price risk if

·        It purchases/sells a commodity, the price of which is fixed by reference to an international benchmark ; or

·        It purchases/sells a product which contains a commodity and the price of the product is linked to an international benchmark of the commodity.

iv. An eligible entity will be said to have indirect exposure to commodity price risk if it purchases/sells a product which contains the commodity and the price of the product is not linked to an international benchmark of the commodity.

v. An eligible entity will be said to have exposure to freight risk if it is engaged in the business of refining oil or in the business of shipping.

vi. Bank(s) refer to banks licensed as Authorised Dealer – Category I.

Eligible Commodities are :

·        All commodities (except Gold, Gems and precious stones) in case of direct exposures to commodity price risk:

·        Aluminum, Copper, Lead, Zinc, Nickel, and Tin In case of indirect exposures to commodity price risk:

This list of eligible commodities would be reviewed annually.

Permitted Products - Permitted products refer to the following:

a. Generic Products

·        Futures and forwards

·        Vanilla options (call option and put option)

·        Swaps

b. 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

Hedging of Commodity Price Risk: Eligible entities, having exposure to commodity price risk, may hedge such exposure in overseas markets, using any of the permitted products.

Hedging of Freight Risk: Eligible entities, having exposure to freight risk, may hedge such exposure in overseas markets, by using any of the permitted products.

Other Operational Guidelines:

i. Banks may permit eligible entities to hedge risk and may remit foreign exchange outside India in respect of such transactions after satisfying themselves that :

·        The entity has exposure to such risk, contracted or anticipated.

·        The quantity proposed to be hedged and the tenor of the hedge are in line with the exposure.

·        In case of OTC derivatives, the requirement to undertake OTC hedges is justified.

·        In case of hedging using a benchmark price other than that of the commodity exposed to, the requirement to undertake such hedges is justified.

·        Such hedging is taken up by the management of the entity under a policy approved by the Board of Directors of a company or equivalent forum for others.

·        The entity has the necessary risk management policies in place.

·        The entity has reasonable understanding of the utility and likely risks associated with the products proposed to be used for hedging.

ii. OTC contracts shall be booked with a bank or with non-bank entities which are permitted to offer such derivatives. For this purpose, a list of acceptable jurisdictions shall be specified by FEDAI.

iii. Structured products may be permitted to eligible entities who are

·        listed on recognized domestic stock exchanges or

·        fully owned subsidiaries of such entities or

·        unlisted entities whose net worth is higher than Rs. 200 crores, subject to the condition that such product are used for the purpose of hedging as defined under these directions.

iv. All transactions related to hedging shall be routed through a special account for this purpose.

v. Banks shall keep on their records full details of all hedge transactions and related remittances made by the entity.

vi. Banks shall obtain an annual certificate from the statutory auditors of the entity confirming that the hedge transactions and the margin remittances are in line with the exposure of the entity. The statutory auditor shall also comment on the risk management policy of the entity for hedging exposure to commodity price risk and freight risk and the appropriateness of the methodology to arrive at the quantum of these exposures.

vii. Banks shall undertake immediate corrective action in case of any irregularity or misuse of these directions. All such cases should be reported to Chief General Manager, Financial Markets Regulation Department, Reserve Bank of India.

Standby Letters of Credit (SBLC) / Guarantees - Banks are permitted to issue Standby Letters of Credit (SBLC) / Guarantees, for a maximum period of one year, in lieu of making a remittance of margin money for commodity hedging transactions. Banks should ensure that these SBLCs / Guarantees are used by their clients for the intended purposes.

Realisation and repatriation of foreign exchange - Realisation and repatriation of foreign exchange resulting from permitted transactions shall be guided by the provisions of the Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015.

Report to Reserve Bank - Banks shall submit a quarterly report Reserve Bank of India. In case of no transactions, a “Nil” report may be submitted.

Based on RBI master direction dated 12^th March 2018. For further clarification please visit www.rbi.org.in .............. Poppy