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Modifications to Comprehensive Guidelines on Derivatives by Reserve Bank of India

As per the modifications made to the comprehensive guidelines on derivatives issued by the Reserve Bank of India in early August 2011, banks cannot sell derivatives to corporates without getting approval from the board of directors of such corporates. It is significant to note that banks would be allow to deal with derivatives with any corporate only if the company has a risk management policy approved by its Board in place among several other conditions.

As per the modifications the Banks are required to obtain Board resolution from the corporate that states the following:
1. The corporate has in place a Risk Management Policy approved by its Board which contains the following:

  • Guidelines on risk identification, measurement and control
  • Guidelines and procedures to be followed with respect to revaluation and monitoring of positions
  • Names and designation of officials authorized to undertake transactions and limits assigned to them
  • A requirement that the assignment of limits to an official would be specific and in case the limits assigned are not quantified, then the bank should offer derivative products to that client only after getting appropriate documents certifying assignment of specific limits
  • Accounting policy and disclosure norms to be followed in respect of derivative transactions
  • A requirement to disclose the MTM valuations appropriately
  • A requirement to ensure separation of duties between front, middle and back office
  • Mechanism regarding reporting of data to the Board including financial position of transaction etc

2. The corporate has laid down clear guidelines for conducting the transactions and institutionalised the arrangements for a periodical review of operations and annual audit of transactions to verify compliance with the regulations.

3. Market-makers should not undertake derivative transaction with users till they provide a Board or equivalent forum resolution stating that they have in place a Board approved Risk Management Policy which contains the details as mentioned above.

Source: Comprehensive Guidelines on Derivatives: Modifications

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