RBI Grade BNABARD ESISEBI
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Draft norms issued by the Reserve Bank of India (RBI) on rupee non-deliverable derivative contracts (NDDCs) are expected to encourage banks to expand operations in GIFT City’s International Financial Services Centre (IFSC).
Background
- Non-deliverable derivatives are cash-settled contracts widely used offshore to hedge or speculate on currencies like the Indian rupee.
- India has been promoting GIFT City as a global financial hub through regulatory incentives.
- Authorised Dealer (AD) Category-I banks are key participants in forex markets.
Key Provisions in the Draft Framework
- Permission to trade rupee NDDCs
- AD banks may undertake NDDCs with other ADs and overseas entities, including IFSC Banking Units (IBUs) and Offshore Banking Units (OBUs).
- Contracts may be cash-settled in rupees or foreign currency.
- Eligibility linked to having an operating IBU.
- Indirect push to GIFT City
- Access to offshore trading platforms for NDDCs is restricted to banks with an operating IBU.
- This is expected to incentivise banks to establish or deepen presence in the IFSC.
- Trading on offshore electronic trading platforms (ETPs)
- AD banks may undertake forex and interest rate derivative trades on offshore ETPs.
- Platforms must be located in Financial Action Task Force (FATF) member jurisdictions and regulated by global standard-setting bodies.
- Rupee trades allowed only with non-residents.
- Transaction data must be publicly disseminated.
- Expanded purposes for OTC derivative transactions
- Includes market-making and proprietary trading.
- Allows entry into non-deliverable contracts with non-bank entities.
- Deployment of surplus foreign currency funds
- Overnight placements and reverse repos against overseas sovereign debt.
- Investment in short-term overseas money market or sovereign debt instruments.
- Lending under Foreign Exchange Management regulations.
- Investment of FCNR (Bank) funds in long-term overseas sovereign debt subject to conditions.
Facts
- NDDC: Non-deliverable derivative contract settled in cash without physical currency exchange.
- AD Category-I Bank: RBI-authorised bank permitted to deal in foreign exchange.
- IFSC (GIFT City): India’s international financial centre in Gujarat.
- FATF: Global body combating money laundering and terrorist financing.
