##Treasury Alert2 Rbi Comprehensive Guidelines Derivatives Modification Dated 2november2011

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  Treasury alert 2/2011  RBI’s Comprehensive Guidelines on  Derivatives – modication dated 02 November 2011  How could it impact you? Our previous ‘Treasury alert 1/2011’ shared  with you, summarises the impact of modication on ‘Comprehensive Guidelines on Derivatives’  ,  April 2007 issued by Reserve Bank of India (RBI)  with regard to ‘ Suitability and Appropriateness  Policy  ’ for offering derivative products to user.To enhance the guidelines issued in August 2011 and provide clarity on ‘  Broad principles for undertaking derivative transactions by market makers’   and ‘ Suitability and Appropriateness  Policy  ’, RBI has issued further modication guidelines on November 02, 2011. These changes are in response to the suggestions made by Foreign Exchange Dealer Association of India (FEDAI) and other market participants. Overview of signicant changes Prior to the issuance of this guideline, there  were ambiguities with regards to: ã Which derivative product can be treated as a structured derivative product? ã Whether  ‘Suitability and Appropriateness  Policy’   will apply to forex forward contract or not? ã Whether a derivative can be treated as an underlying for a structured derivative product? ã What will be the effective date for the modications issued? ã What should the Corporate include in their approved Risk Management Policy for undertaking structure derivative product or any other derivative?  Following are the signicant changes stated in modication guidelines issued on November 02, 2011:  Broad principles for undertaking derivative transactions by market makers Generic derivative products may include the following instruments used to hedge an existing interest rate and forex exposure, on a standalone basis: ã Forex Forward Contracts ã Forward Rate Agreements ã Interest rate caps and oors (plain vanilla only) ã Plain Vanilla Options (call option and put option) ã Interest Rate Swaps ã Currency Swaps including Cross-Currency Swaps Structured derivative products are either combination of ‘cash instrument and one or more generic derivative products’ or ‘two or more generic derivative products’ but it should not contain derivative instruments as underlying. Examples of structured derivatives are: ã Interest rate swaps with put or call option, ã Cross currency interest rate swaps with interest rate cap or oor.Cash instruments are a nancial instruments  which are available in the money market like certicates of deposits; repurchase agreements i.e. the Repos, bills of exchange, interbank loans; commercial papers etc.  Applicability for forex forward contract  Notication claries that the said Policy will not be applicable for forex forward contracts. Forex forward contract transaction can be undertaken if permitted under Foreign Exchange Management Act, 1999 (FEMA) or in terms of the rules or directions issued by RBI.Effective dateThe above modied guideline will be effective for transactions from January 1, 2012. Specic expectations from the corporates To undertake any derivative product other than a structured derivative product, a corporate will now be required to provide a copy of their Board Resolution, which contains the following: ã the limit assign ed by the corporate to each bank. ã name and designation of the ofcials authorised to undertake derivative transactions on behalf of the company, list of ofcials to whom transactions will be reported by the Bank and person(s) authorised to sign ISDA and related agreements. These ofcials will be distinct from those authorized to undertake the transactions. ã specic products that can be transacted by the designated ofcials named therein. In order to undertake a structured derivative product, the corporate is required to have a Risk Management Policy approved by the board which contains the following: ã Guidelines on risk identication, measurement and control; ã Guidelines and procedures to be followed  with respect to revaluation and monitoring of positions; ã Designation of ofcials authorized to undertake transactions and limits assigned per transaction; ã  Assigned limits on a per transactipon basis to the ofcials authorised to transact derivatives. ã  Accounting policy and disclosure norms to be followed in respect of derivative transactions; ã  A requirement to disclose MTM valuations appropriately; ã Segregation of duties between front, middle and back ofce; ã Mechanism regarding reporting of data to the Board which will include nancial position of transaction etc.  Questions that you may wish to consider? 1. Have you initiated efforts to develop and/or update the nancial risk management framework in your organisation?2. Have you implemented a process for identifying appropriate controls relating to the treasury operations? Further, how do you ensure control over accounting for derivative nancial instruments?3. Does your risk management policy dene proper authorisation matrix for undertaking a derivative transaction?4. Is there an appropriate segregation of duties  within the organisation with respect to the structured derivative transactions?5. Do you have access to market makers calculator and are you able to arrive at   fair values at each reporting date for structure derivative products? 6. Have you evaluated adopting hedge accounting guidance which will help mirror the risk management objective and the nancial statements accounting?7. Are the internal audit procedures appropriately tailored to identify the key controls and ensure compliance with the ongoing increased regulatory guidance?8. Do you trade or intend to trade in structrured derivative products?  How can we help? PwC would like to take the opportunity to share insights and experiences for the change in compliance for derivative nancial instruments.The areas where we can provide service: ã Help in formulating a Treasury Policy; ã  Advise on policies, procedures and controls to be built in the organisation around the derivative transactions; ã  Assist in dening a tresury framework; ã  Assist in evaluation and implementation of hedge accounting solutions for derivative nancial instruments; ã Evaluate the internal control framework and suggest tailoring the internal audit steps. This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specic professional advice. © 2011 PricewaterhouseCoopers Private Limited. All rights reserved. “PwC”, a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member rms of PwC International Limited, each of which is a separate and independent legal entity. NJ 246 - November 2011 RBI_Treasury Alert.indd Designed by: PwC Brand & Communications, India You can contact your local PwC ofce, or call us at   Delhi   +91 124 462 0112  Mumbai +91 22 6669 1206   +91 22 6669 1208
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