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RBI Circular on Risk Management & Commodity Hedging
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RBI in its circular on ‘Risk Management & Interbank dealings – Commodity Hedging’ released on January 17, 2012 has announced changes to the commodity hedging guidelines applicable to companies involved in commodity markets and Authorized Dealers. The key changes are as follows:
- All AD category-I banks are permitted to undertake hedging transactions in international commodities markets on behalf of resident Indian companies engaged in import or export trade and are exposed to commodity price risks. Earlier RBI had permitted only specific AD banks to provide commodity hedging.
- Further the AD banks have also been permitted to extend the commodity hedging services to unlisted companies as against only listed companies previously.
- The changes are applicable to companies hedging under the delegated route only and incase of transactions not covered under this route the AD banks would continue to approach the RBI for approval route.
- The RBI has permitted user (companies) to enter into exchange traded futures and options (buy positions only). Additionally RBI has also permitted the users to enter into structured OTC commodity option contracts as well, however subject to the following conditions: -
- Company should have a minimum networth of Rs.100 cr.
- Following Hedge Accounting Treatment under IFRS.
- Company should have a risk management policy allowing use of the structured OTC option contracts.
- Company cannot write a standalone option.
- Company cannot be a net receiver of premium.
- Only plain vanilla options permitted and exotics like digitals, barriers etc not permitted.
- AD banks may stipulate further safeguards like continuous profitability.
- Companies are required to submit a description of hedge strategy covering aspects like business activity, nature of risk and instruments, details about brokers & exchanges, turnover and tenor details.
- Companies need to have documented risk management policy approved by the Board of directors covering details such as risk identification & measurement, guidelines for monitoring positions and details of the persons authorized to undertake transactions.
- AD banks are allowed to deny hedging services incase they have any doubts relating to the documents or the risk profile of the company.
- Only transactions with the purpose of hedging can be undertaken and no transactions can be undertaken to speculate or arbitrage in the commodity markets.
- Cancellation of commodity option position with an offsetting contract with the same broker is permitted.
- The corporate user is required to open a Special Account with AD bank to facilitate all the hedging related transactions through this account without further reference to RBI.
- Reconciliation of broker’s positions should be carried out by the corporate user.
- AD bank should get the broker’s monthend position verified and certified by the corporate user in order to ensure backing of broker potions with underlying exposure.
- Corporate user is required to submit annual statutory audit certificate confirming adherence to all the stipulated terms and conditions for commodity hedging.
Companies allowed to transact in commodity markets are i) Listed companies importing or exporting any commodities (except gold, silver & platinum); ii) Domestic companies engaged in refining crude oil and iii)Domestic companies dealing in aluminum, copper, lead, nickel, zinc, Aviation Turbine Fuel (ATF), crude oil & petroleum products marketing.
- Aniket More
(Manager – Strategic Advisory Services)
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