Margin for Derivative Contracts under FEMA

Varun Hariharan

21 Oct, 2021

The Reserve Bank of India (RBI) brought out a major notification which relates to Foreign Exchange Management (Margins for Derivative Contracts).  This notification was brought by the RBI by incurring section 2(47) of the Foreign Exchange Management Act, 1999.

Definitions under the Margin for Derivative Contracts

Under this act, there are many definitions which are considered by the RBI. The following are the definitions which require to be analysed.

• Authorised Dealer- The meaning of authorised dealer will include any bank or financial institution that carries out transactions related to foreign exchange. Authorised dealers are also known as authorised banks.
• Derivatives- Derivative is a security instrument which has meaning under regulation 2 of Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.
• Margin- A margin is something related to security or collateral, which is used by the parties in a derivate contract. It relates to some form of credit risk which is provided and which is received by another party.
• Permitted Derivative contract- It will include any contract which occurs under the Foreign Exchange Inter-Banking Rules or the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000^[1]. This can also include any form of interest derived or derivate rate from a rupee based contract under Margin for Derivative Contracts. It can be any form of credit derivative contract or contract which is considered as a derivative as per the RBI.

What is not allowed under Margin for Derivative Contract?

Under this act, as per section 3, any person is not allowed to deal or receive any form of derivatives without the permission of the RBI. Under this, no form of posting or collecting margin is allowed by any individual.

Can RBI issue directions to authorised banks for posting and collecting any margins related to derivatives?

Yes under section 4 of this act, the RBI has the authority to issue directions and circulars related to any form of derivative which is issued outside India. As per the above act, any derivative can be collected and also posted after prior permission.

Conclusion

Read our article:FEMA Guidelines on Foreign Currency Accounts