The
Presidents/Chief Executives
All Banks/DFIs
Dear
Sirs/Madam,
FINANCIAL
DERIVATIVES BUSINESS REGULATIONS (FDBR)
As you are aware, banks at present
are allowed to undertake the business of financial derivatives
after getting specific transactional approval from the State
Bank for entering into such transactions. In order to develop
an Over the Counter (OTC) financial derivatives market in
the country, it has been decided to allow Banks/DFIs to
undertake derivatives business, provided they meet the eligibility
criteria and obtain Authorized Derivatives Dealer (ADD)
or Non Market Maker Financial Institution (NMI) status from
the State Bank. Banks/DFIs obtaining the status of ADD or
NMI should ensure that the derivative transactions undertaken
do not contravene any other applicable laws, regulations,
or restrictions, in force.
Attached
to this circular is the Financial Derivatives Business Regulations
(FDBR), which interalia contains the regulatory framework
for the OTC financial derivative transactions. FDBR comprises
of two parts, the main body of regulation and the product
annexures. The first part i.e. the main body sets out the
eligibility criteria and procedure for the institutions
to become an ADD or NMI. It also sets the minimum operational,
dealing and risk management standards, reporting and disclosure
requirements. The second part contains the specifics related
to Foreign Currency Options, Forward Rate Agreements, and
Interest Rate Swaps, including permissible currency, tenor,
and benchmarks.
Banks/DFIs
that meet the eligibility criteria given in the attached
FDBR and are willing to deal in derivatives business, as
ADD or NMI, may apply in writing to the Banking Supervision
Department of the State Bank stating the status they wish
to acquire, and submit alongwith their application a full
set of requirements as set out in paras 11- 14 of the
FDBR as appropriate. The State Bank while reviewing their
application will conduct an onsite assessment of the applicant
on its capability/capacity to conduct derivatives business
as ADD or NMI.
The
FDBR shall become effective from the date of issuance of
the circular. Any financial derivative transaction approved
by the State Bank prior to the issuance of these regulations
shall be deemed to be executed within these regulations.
Financial Institutions desiring to enter into derivative
transactions, which do not fall within the scope of these
regulations, will be required to obtain specific approval
from the State Bank prior to entering into such transactions.
Encl:
As above
FDBR
Annex
PI
Annex
PII
Annex
PIII