Money & Banking

RBI amends eligibility criteria for use of OTC forex derivatives

Our Bureau Mumbai | Updated on May 16, 2011 Published on May 16, 2011




The Reserve Bank of India on Monday amended the eligibility criteria for the users of Over the Counter (OTC) foreign exchange derivatives in order to overhaul the risk management practices.

In a notification, the RBI said that listed companies and their subsidiaries/joint ventures/associates having common treasury and consolidated balance sheet or unlisted companies with a minimum net worth of Rs 200 crore would be permitted the use OTC derivatives.

In the earlier guidelines, unlisted companies with a minimum net worth of Rs 100 crore were allowed to use OTC derivatives.

According to the treasury official of a public sector bank, the RBI wants only those companies which are in a position to take a loss to take part in the OTC derivatives market, given the potential risks.

“The RBI has done this to ensure good risk management practices,'' he said.

According to the notification, companies which use these cost reduction structures should also follow certain other conditions.

The RBI said that all such products should be fair valued on each reporting date, companies should have a risk management policy with a specific clause in the policy that allows using the type/s of cost reduction structures, disclosures should be made in the financial statements, and companies should follow the principle of prudence which requires recognition of expected losses and non-recognition of unrealised gains.

Published on May 16, 2011
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