To,

Chief General Manager, 8th July 2015

Financial Markets Regulation Department,

Reserve Bank of India,

Central Office, 23rd Floor,

Shahid Bhagat Singh Marg,

Mumbai-400 001

Dear Sir/Madam,

Re: Draft Guidelines on Writing of plain vanilla European Call and Put

Currency options by resident exporters and importers of goods and services

At the outset, we, at Indian Association of Investment Professionals (IAIP1), a member society of the CFA Institute2 appreciate the opportunity to comment on the Draft Framework on writing of plain vanilla call and put options by resident exporters and importers of goods and services:

  1. Kindly refer to para 3(e) wherein it is proposed that Banks may obtain necessary supporting documentary evidence at the time of entering into a covered option transaction.

Comments

Under the Master Circular on Risk Management and Inter-Bank Dealing, in general the facility of providing the underlying within 15 days of date of transaction is well established. It would additionally burden the user of written options if production of underlying is before the transaction. In any event provisions regarding non-submission of underlying within stipulated period including cancellation of foreign exchange contract between bank and the option writer is well established. We would suggest that the current form of production of underlying be continued for writing call and/or put options

  1. Kindly refer to para 3(j) wherein it is proposed that that Covered option contracts shall be settled only by delivery on spot basis. Under no circumstances the option writer may access the forex market to undertake outright purchase or sale of foreign currency to fulfil his delivery obligation under the covered option written by him. Any residual mismatches, however, may be managed through appropriate forex swaps.

Comments

In none of the approved products except for spot transactions it has been stipulated that settlement by delivery only happens (Gross Settlement). The importer/exporter is providing underlying however he has no complete control over the receipt or payment of the foreign exchange cash flows. Under option transactions there is no possibility of pre-utilization of contracts unlike forwards

We would suggest that no additional restriction of gross settlement be maintained for this product concerned. The economic impact of gross and net settlement of the written options shall be same

The Indian Association of Investment Professionals (“IAIP”) is an association of over 900 local investment professionals. The Association consists of portfolio managers, security analysts, investment advisors, and other financial professionals, that; promote ethical and professional standards within the investment industry, facilitate the exchange of information and opinions among people within the local investment community and beyond, and work to further the public's understanding of the CFA designation and investment industry.

2CFA Institute, the global association of investment professionals that sets the standard for professional excellence and credentials, is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. CFA Institute has more than 112,000 members in 138 countries, with membership in India growing at a particularly strong pace. CFA Institute maintains relationships with a number of regulators in major financial markets.

  1. Kindly refer to para 3 (k) wherein it has been proposed that AD Cat-I bank at the time of entering into a covered option with its constituent may obtain an undertaking to the effect that the option writer has not sold an option against the same underlying to any other AD Cat-I bank or hedged it with any other AD Cat-I bank. The undertaking shall be obtained on the company’s letterhead and signed by the Chief Financial Officer (CFO) or the senior most functionary responsible for company's finance and accounts and the Company Secretary (CS). In the absence of a CS, the Chief Executive Officer (CEO) or the Chief Operating Officer (COO) shall co-sign the undertaking along with the CFO.

Comments

The current framework of regulations around derivative products covers suitability and appropriateness for different type of product offerings, form of Board resolution and responsibility of banks and hedgers while entering in to the hedging transactions including that related to hedging of underlying and are already very prescriptive.

We would suggest that the current framework of regulations are sufficiently detailed with safeguards built in and it would not be advisable to ask for additional undertaking in respect of written options specifically from CFO/CEO/CS. Kindly also refer to our other general comments.

Other comments

  1. We would like to suggest that the facility of written plain vanilla call and put options should be allowed subject to minimum net worth and other criteria and stipulations akin to cost reduction structures and INR-USD structures.
  1. We would suggest that this auditors certificate (at an annual frequency) should be obtained certifying that option writer has not sold an options against same underlying to any other bank and all written options were covered by underlying at all times

We thank you for the opportunity to provide feedback on this important guideline and shall be delighted to visit your offices to discuss the same in detail.

If you or your staff have questions or seek further clarification, please do not hesitate to contact Vinay Bagri, CFA at +91 98361 88553 at

Sincerely yours,

Vinay Bagri, CFA

Chair – IAIP Advocacy Committee

Indian Association of Investment Professionals

Member Society of CFA Institute

1/3