Amendments In RBI’S Master Direction On Risk Management And Inter-Bank Dealings

The Reserve Bank of India (RBI) on May 03, 2024, has issued amendments to its Master Direction on Risk Management and Inter-Bank Dealings, affecting Authorised Persons, particularly Standalone Primary Dealers (SPDs).[1] These Amendments are effective immediately, superseding any previous circulars listed in the Master Direction.

Legal Framework

These amendments are issued under the authority of relevant sections of the Reserve Bank of India Act, 1934, and the Foreign Exchange Management Act, 1999. It’s essential to note that compliance with these directives is mandatory and does not waive any permissions or approvals required under other applicable laws.

Breakdown of the Key Amendments

Definition of Authorised Persons: The definition of “Authorised Persons” has been expanded to include not only Authorised Dealer Category-I banks but also Standalone Primary Dealers authorised as Authorised Dealer Category-III. Additionally, Recognised Stock Exchanges and Recognised Clearing Corporations, authorised under Section 10(1) of the FEMA, 1999, are now encompassed within this definition. This broader definition ensures comprehensive coverage within the regulatory framework and eliminates ambiguity, ensuring consistent interpretation of the regulations.

Specific Compliance Requirements for Standalone Primary Dealers: Standalone Primary Dealers authorised as Authorised Dealer Category-III are now required to comply with specific directives outlined in the Master Direction – Standalone Primary Dealers (Reserve Bank) Directions, 2016. This ensures tailored regulatory oversight for different categories of financial entities, enhancing efficiency and compliance.

Overseas Foreign Currency Borrowing by Standalone Primary Dealers: The amendments introduce provisions for Standalone Primary Dealers to borrow in foreign currency from approved entities outside India for operational reasons. However, such borrowings must adhere to the prescribed limits outlined in the Master Direction – Standalone Primary Dealers (Reserve Bank) Directions, 2016. Additionally, reporting requirements are stipulated in cases where drawals exceed the prescribed limits, ensuring transparency and accountability.

Risk Management Measures: The amendments introduce measures for managing forex risk, including the establishment of Net Overnight Open Position Limits (NOOPL) and Aggregate Gap Limits (AGL). These limits, set by the boards of respective Authorised Dealers, are communicated to the Reserve Bank through the Centralised Information Management System (CIMS) or email. These measures aim to strengthen risk management practices and ensure the stability of the financial system.

Reporting Requirements for Authorised Dealers

Daily Reporting: Authorised Dealers are now mandated to submit daily statements of Foreign Exchange Turnover in Form FTD and Gaps, Position, and Cash Balances in Form GPB through the Centralised Information Management System (CIMS) by the following working day. This ensures real-time monitoring of foreign exchange activities, enhancing regulatory oversight and risk management.

Quarterly Reporting of Exposures: Details of exposures in foreign exchange must be submitted quarterly through CIMS by the 30th of the month following the end of the quarter. This includes comprehensive reporting of exposures for all corporate clients meeting prescribed criteria, based on the Authorised Dealers’ own books.

Weekly Reporting of Option Transactions: Authorised Dealers are required to forward details of option transactions (FCY-INR) undertaken on a weekly basis through CIMS or email by the first working day of the following week. This frequent reporting facilitates timely analysis and regulatory response to market dynamics.

Monthly Reporting of Foreign Currency Borrowings: Authorised Dealers must report their total outstanding foreign currency borrowings under all categories on the last working day of every month through CIMS by the 10th of the following month. This reporting ensures ongoing monitoring of borrowing activities, contributing to risk management efforts.

Annual Reporting of Non-Resident Bank Accounts: The Head/Principal Office of each Authorised Dealer Category-I bank is required to furnish an up-to-date list of all offices/branches maintaining Rupee accounts of non-resident banks by January 15th of the following year through CIMS or email. This facilitates effective classification and jurisdictional oversight of non-resident bank accounts.

Quarterly Reporting of Doubtful Transactions: Authorised Dealers should report doubtful transactions involving frequent cancellation of hedge transactions and/or underlying trade transactions by non-residents on a quarterly basis through CIMS by the 10th of the month following the end of the quarter. This reporting aids in identifying potential risks and ensuring compliance with regulatory requirements.

Reporting to the Trade Repository (TR): Authorised Dealers are mandated to report all OTC foreign exchange derivative contracts and foreign currency interest rate derivative contracts to the Trade Repository (TR) of Clearing Corporation of India Ltd. (CCIL) within specified timelines. This includes detailed reporting requirements for different types of transactions, ensuring comprehensive oversight and accuracy in reporting.

Conclusion

The recent amendments to the RBI’s Master Direction on Risk Management and Inter-Bank Dealings signify the regulator’s commitment to maintaining strong oversight and regulatory framework within the financial sector. By incorporating SPDs into the regulatory fold and refining reporting requirements, the RBI aims to enhance transparency, efficiency, and risk management practices within the financial sector, thereby contributing to the stability and integrity of the financial system.

[1] RBI/2024-25/32, Reserve Bank of India – Notifications (rbi.org.in)