RBIvon June 06, 2023 has issued amended Master Direction – Risk Management and Inter-Bank Dealings dated July 5, 2016 to revise compliances governing Non-deliverable derivative contracts (NDDCs). Banks in India which operate International Financial Services Centre (IFSC) Banking Units (IBUs) were permitted to transact in INR Non-deliverable foreign exchange derivative contracts (NDDCs) with non-residents and with each other with effect from June 1, 2020. With a view to develop the onshore INR NDDC and to provide residents with the flexibility to efficiently design their hedging programmes, it has been decided to permit banks with IBUs to offer INR NDDCs to resident users in the onshore market. These banks will have the flexibility of settling their NDDC transactions with non-residents and with each other in foreign currency or in INR while transactions with residents will be mandatorily settled in INR.
The Master Direction – Risk Management and Inter-Bank Dealings dated July 5, 2016 was issued for Authorized Dealer Category – I Banks to lay down lay down the modalities as to how the foreign exchange business has to be conducted by the Authorized Persons with their customers / constituents. The following amendment are made w.r.t NDDCs:
The existing definition of NDDCs states that they are foreign exchange derivative contracts involving the Rupee, entered into with a person resident outside India, and settled without involving the delivery of the Rupee. The primary focus of this definition is on the absence of physical currency exchange.
The revised definition introduces clarity by stating that NDDCs are over-the-counter (OTC) foreign exchange derivative contracts with no delivery of the notional amount of the underlying currencies. Additionally, it emphasizes that NDDCs are cash settled. This modification ensures a more comprehensive understanding of the nature and settlement mechanism of these derivative contracts.
The revised direction also distinguishes NDDCs offered to persons resident outside India from other derivative contracts involving INR.
Further, the revised direction introduces the option for banks to undertake these transactions through their branches in India or foreign branches, regardless of whether they are Indian or foreign banks. The revision also explicitly permits cash settlement in INR or any foreign currency, broadening the scope of settlement options.
The newly inserted direction allows banks with an Authorized Dealer Category-I license and operating IBUs to offer NDDCs involving INR to resident non-retail users from their branches in India. This provision is subject to compliance with the guidelines specified in the revised direction mentioned earlier. The transactions in this case must be cash-settled in INR.