Foreign Portfolio Investment

Position Limits of FPIs in Currency Derivative Segments & Contracts

The investment by an investor in the assets of a foreign nation, such as stocks and bonds listed on a stock exchange is known as Foreign Portfolio Investment (FPI). In addition to foreign direct investment (FDI), foreign portfolio investment is one of the usual ways for investors to participate in an overseas company. As compared to FDI, foreign portfolio investors consist of passive ownership; investors hold no control over ventures or direct ownership of property or stake in the company. In order to invest in the currency derivative segments, foreign portfolio investors must adhere to the specified limits. The present article will discuss the position limits of the FPI in the currency derivative segment and contracts.

Position limits of FPI

The FPIs are required to be permitted to trade in the currency derivative segments of the stock exchange subject to the terms and conditions mentioned below:

A. Position limits of category I & II FPIs other than individuals, family offices, and Corporates

The gross open positions of the FPI across all contracts in their respective currency pairs shall not exceed the limits as enumerated below:

Currency Pairs	Position Limits
USD-INR	Gross open position shall not exceed 15% of the total open interests across all contracts or USD 100 Million, whichever is higher.
EUR-INR	Gross open position shall not exceed 15% of the total open interests across all contracts or EUR 50 Million, whichever is higher
GBP-INR	Gross open position shall not exceed 15% of the total open interests across all contracts or GBP 50 Million, whichever is higher.
JPY-INR	Gross open position shall not exceed 15% of the total open interests across all contracts or JPY 2000 Million, whichever is higher.

B. Position Limits of Category II FPIs that are individuals, family offices and corporates

The gross open positions of the FPI across all contracts in their respective currency pairs shall not exceed the limits mentioned below. Further, for calculating the FPI level gross open positions, the long position shall be considered as long futures, long calls and short puts & short positions should be considered as short futures, short calls, and long puts.

Currency Pairs	Position Limits
USD-INR	Gross open position shall not exceed 6% of the total open interests across all contracts or USD 20 Million, whichever is higher.
EUR-INR	Gross open position shall not exceed 6% of the total open interests across all contracts or EUR 10 Million, whichever is higher.
GBP-INR	Gross open position shall not exceed 6% of the total open interests across all contracts or GBP 10 Million, whichever is higher.
JPY-INR	Gross open position shall not exceed 15% of the total open interests across all contracts or JPY 2000 Million, whichever is higher

C. Positions are taken to hedge underlying exposures

In the case of positions taken to hedge underlying exposures, the position limit linked to open interest shall be applicable when opening a position. Such positions shall not unwind in the event of a drop in total open interest in a currency pair at a stock exchange. However, participants can increase their existing positions or create new positions in the currency pair once they comply with the position limits.

D. Limits on for FPIs and Domestic Clients

The limits for FPIs and domestic clients based on the Underlying Exposure:

• The FPIs are allowed to take long or short positions without establishing the existence of underlying exposures up to a single limit of USD 100 million or equivalent across all currency pairs containing INR and across all stock exchanges.
• The FPI must ensure that their short positions in all stock exchanges shall not exceed USD 100 million across all contracts in FCY –INR.
• The FPIs are required to have underlying exposures in Indian debt or equity securities (including equity or debt mutual funds) in order to take a long position in excess of USD 100 million in all contracts in FCY-INR.

E. position limits in Exchange Traded cross-Currency F & O Contracts

The FPIs are allowed to positions limit in the exchange-traded cross-currency futures & options contracts and exchange-traded currency option contracts currency pairs subject to the terms and conditions as enumerated below:

Positions limits of category I & II FPIs other than Individuals, Family Offices, and Corporates

The following limits shall be the total limits available to the stock brokers for taking positions on a proprietary basis and for positions of their clients.  

Currency Pairs	Position Limits
EUR-USD	Gross open position shall not exceed 15% of the total open interests across all contracts or EUR 100 Million, whichever is higher
GBP-USD	Gross open position shall not exceed 15% of the total open interests across all contracts or GBP 100 Million, whichever is higher.
USD-JPY	Gross open position shall not exceed 15% of the total open interests across all contracts or USD 100 Million, whichever is higher.

Positions limits of category II FPIs that are Individuals, Family Offices, and Corporates

Currency Pairs	Position Limits
EUR-USD	Gross open position shall not exceed 6% of the total open interests across all contracts or EUR 100 Million, whichever is higher.
GBP-USD	Gross open position shall not exceed 6% of the total open interests across all contracts or GBP 10 Million, whichever is higher
USD-JPY	Gross open position shall not exceed 6% of the total open interests across all contracts or USD 10 Million, whichever is higher.

Implementation by the Clearing Corporation and Custodians of FPIs

The clearing corporations and custodians of FPIs are required to implement the following for the purpose of monitoring of positions of FPIs:

• The clearing corporation should provide details on the FPIs day end and day’s open positions at the end of the day to custodians of the FPI.
• The custodian of the FPI should aggregate the positions taken by the FPI on the currency derivatives segments of all the stock exchanges and shall further such details to the designated bank of the FPI.
• The custodian of the FPI should also provide the market value of the underlying exposure of the FPI to its designated bank.

The onus of Compliance with the provisions

The onus of complying with the requirements of the above provisions shall lie with the FPI. In case of an infringement, in that case, the FPI shall be held liable for the action that the Reserve Bank of India may warrant in terms of the Foreign Exchange Management Act 1999 and its regulations or directions or orders etc. Further, these limits shall be monitored by the stock exchanges or clearing corporations and in case of any breaches, the same shall be reported to the RBI. For this purpose, the SEBI ¹ or clearing corporations should devise a suitable mechanism for monitoring the above limits.

Conclusion

The Foreign Portfolio investor is allowed to invest in the currency derivative segments. However, such participation will depend on the above-mentioned position limits. It is required that the position limits shall be followed in order to regulate the instruments properly in the market. Further, the onus of proving that the investments are under the specified limit will remain with the FPI to ensure accountability. The stock exchanges and clearing corporations shall further devise a mechanism to monitor such limits.

Read Our Article: How Foreign Portfolio Investors can Invest in India?

1. https://www.sebi.gov.in/