Forward contract being an agreement to exchange currencies at a future date, it is likely that sometimes the customer may be unable to adhere to the contracted delivery schedule or the underlying transaction may itself get modified or cancelled. The importer/exporter may, therefore, in these cases request for

1. Early delivery
2. Cancellation

This article gives detailed Foreign Exchange Dealer Association of India (FEDAI) guidelines on the subject. Future articles will discuss the monetary impact of the same on importer/exporter.

FEDAI Guidelines

1. It is optional for the Bank to

• Accept/give early delivery
• Extend the contract

2. It is the responsibility of the customer to effect delivery or to request for cancellation, as the case may be, on or before the maturity date of the contract.

3. Early Delivery

If a bank accepts or gives early delivery, the bank shall recover/pay swap difference, if any. Interest on outlay/inflow of funds for such swaps shall also be recovered / paid.

4. Extension

Foreign exchange contracts where extension is sought by the customers shall be cancelled (at an appropriate selling or buying rate as on the date of cancellation) and rebooked simultaneously only at the current rate of exchange. The difference between the contracted rate and the rate at which the contract is cancelled shall be recovered from/paid to the customer at the time of extension. Such request for extension shall be made on or before the maturity date of the contract.

5. Cancellation

• At Request of Customer:
  • Recovery / Payment of Loss / Gain
    • In case of cancellation of a contract at the request of a customer, (the request shall be made on or before the maturity date) the Authorised Dealer shall recover/ pay, as the case may be, the difference between the contracted rate and the rate at which the cancellation is effected.
    • The process of recovery of exchange difference on cancellation of forward contracts on or before the maturity date will be as follows:
      • The recovery can be either in lump sum or in installments.
      • Repayment period should not extend beyond the maturity date of the contract.
      • The repayment installments should be uniformly received over the remaining maturity of the contract and its periodicity should be at least once in a quarter
    • The banks should have Board approved policy to deal with recovery and payment of exchange difference and other charges on above lines. The details should be made available to the customers transparently on upfront basis
  • Rate at which cancellation is to be effected:
    • Purchase contracts shall be cancelled at T.T. selling rate of the contracting Authorised Dealer
    • Sale contracts shall be cancelled at T.T. buying rate of the contracting Authorised Dealer
    • Where the contract is cancelled before maturity, the appropriate forward T.T. rate shall be applied.
  • Notwithstanding the fact that the exchange contract between the customer and the bank becomes impossible of performance, for whatever reason, including Government prohibitory orders, the exchange contract shall not be deemed to have become void and the customer shall forthwith apply to the Authorised Dealer for cancellation
• In the absence of any instructions from the customer,
  • A contract which has matured shall be cancelled by the bank within three working day after the maturity date.
  • Swap cost, if any, shall be recovered from the customer under advice to him.
  • When a contract is cancelled after the maturity date, the customer shall not be entitled to the exchange difference, if any, in his favour, since the contract is cancelled on account of his default. He shall, however, be liable to pay the exchange difference, against him.

6. Swap cost/gain

• In all cases of early delivery of a contract, swap cost shall be recovered from the customer, irrespective of whether an actual swap is made or not. Such recoveries should be made either back-ended or upfront at discretion of the bank.
• Payment of swap gain to a customer shall be made at the beginning or at the end of swap period as per the bank‟s own policy in this regard.

7. Outlay and Inflow of funds:

• Authorised Dealer shall recover interest on outlay of funds for the purpose of arranging the swap, in addition to the swap cost in case of early delivery of a contract.
• If such a swap leads to inflow of funds, interest shall be paid to the customer. Funds outlay/inflow shall be arrived at by taking the difference between the original contract rate and the rate at which the swap could be arranged. The rate of interest to be recovered/paid should be determined by banks as per their policy in this regard.
• In case of early delivery of ‘Optional Delivery Date Forward Contract’ interest on inlay/outlay of funds should be calculated up to the date for which the Swap is  done, on account of early delivery.

* Swap: Swap is the simultaneous buying and selling of identical amount of one currency in terms of another currency for differing maturities. The swap loss/gain is the difference between the rate at which currency is purchased and sold. If the Bank has to buy high and sell low, the difference is the swap cost (loss) recoverable from
the customer. Swap gain would accrue when in the vice versa, the Bank buys low and sells high.

Reference

1. Revised FEDAI Rules – 10th Edition: March 2019