Forex derivatives withdrawal under pressure from RBI to deepen markets

after reserve Bank of IndiaEarlier this month as lenders were allowed to offer derivative products, banks such as ICICI Bank Ltd and Axis Bank Ltd sold barrier forex options to clients including Reliance Industries Ltd and Supreme Petrochem Ltd.

The introduction of swaption, along with the return of foreign currency derivatives, is part of efforts to give corporates more risk-management options as India’s global business integration expands. Nevertheless, officials have tightened rules noting that India had to ban derivatives products after the 2008 financial crisis, when a large number of firms were left with huge losses on wrongful bets.

Alok Wadhawan, Deputy General Manager, Corporate Finance, Jindal Steel & Power, said, “Foreign derivatives, especially knock-in barrier options for real import hedging, offer an ideal blend of risk management at a lower cost than traditional vanilla options. can do.” Ltd. “If banks properly price these derivatives, eventually there will be an increase in demand for such products from corporates.”

The payoff on these products depends on whether the underlying asset has reached a pre-determined price.

Corporates in India primarily hedge their forex exposure in the onshore forward market, far away from options trades with such contracts. According to the previous Bank for International Settlements survey, the total daily average of lump-sum forward trading in the Indian rupee globally stood at $62.7 billion in April 2019, up from $5.7 billion in options-related trading.

Authorities are proceeding cautiously, given the experience from 2006–2008, when banks sold products to customers that originally bet on the movement of various currencies, such as the Japanese yen, Swiss franc and euro, without the inherent need for corporate of any assessment. These bets blew up after the global sub-prime crisis, which caused huge losses for companies.

open with caution

The central bank fined nineteen banks, including Citibank NA, Bank of America NA and Barclays plc, in 2011 for unfairly selling these products, including failure to perform due diligence on suitability and failure to sell companies with adequate risk management practices. is included. It also prohibited lenders from offering foreign currency derivative products, allowing only vanilla forwards as a hedging tool.

Now, while derivative products have made a comeback, regulations have been tightened with the distinction between corporate and retail customers. Companies with a minimum net worth of Rs 5 billion are allowed to engage in such transactions. Permitted foreign derivatives are those in which the loss under any scenario would not exceed that if the underlying currency asset was left unhedged, meaning that leveraged derivatives are not allowed.

According to Axis Bank, the size of initial trades in derivatives products, including barrier options, is still small, at around $5 million to $10 million, as companies explore new products.

Neeraj Gambhir, Group Executive and Head of Treasury, Markets and Wholesale Banking Products at Axis Bank, said, “There has been a lot of development as far as regulation is concerned. The whole approach to regulation has changed very strongly. Risks disclosure.”

This story has been published without modification in text from a wire agency feed. Only the title has been changed.