Category Archives: Forex & Currency Hedging

Guidelines on Early Delivery, Extension & Cancellation of Forward Contract

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.

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:
    • 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 recovery/payment of exchange difference on cancellation of forward contracts before the maturity date may be either upfront or back-ended at the discretion of banks.
    • 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 on the 7th 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 end of the swap period.

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.

* 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. FEDAI Guidelines

Basics of Exchange Rate

What is Exchange Rate?

Exchange rate is a rate at which one currency can be exchanged into another currency. In other words, it is the value of one currency in terms of another. Say:

USD 1 = INR 70

Type of Transaction

All foreign exchange transactions undertaken have to be either a purchase transaction or a sale transaction for the bank. The type of transaction is to be determined based on whether the Bank dealing with the foreign exchange is buying or selling the same

Purchase Transaction

In a purchase transaction, the Bank receives a foreign exchange.

Example: Export remittance received in bank’s Nostro account. Bank buys dollar from the exporter and pays INR in exporters cash credit (CC) account.

Sale Transaction

In a sale transaction, the Bank parts with foreign exchange.

Example: Importer makes payment for import bill by buying USD from the bank. Bank debits CC account for the equivalent amount.

Type of Rates

 

TT Buying Rates (Inward Remittance)

The TT buying rate is applicable for:

  1. Inward remittances
  2. Proceeds of export bills
  3. Cancellation of forward sale contract on or after due date
  4. Conversion of RFC, EEFC, FCNR(B) deposits and PCFC/FC Loan into Indian Rupees

OD Buying (Bill Buying Rates )

The bill buying rate is applicable for purchase/discounting of bills and other instruments. Although the Bank on purchasing/ discounting the export bill immediately parts with the Rupee equivalent, the foreign exchange will be received (delivered) on a future date after realisation of the bill. In the case of usance bill, forward rate will be applicable.  However, in the case of sight bill, forward rates are not quoted even though transit period is involved, as bills are likely to be realised early.

TT Selling (Outward Remittance)

The TT Selling rate is applicable for :

  1. Outward remittance in foreign currency
  2. Cancellation of purchase
    • Bill purchased/returned unpaid
    • Bill purchased/transferred to collection a/c
    • Refund of inward remittances
  3. Forward purchase contract cancellation on or after due date
  4. Recovery of interest on PCFC/FC Loan

BC Selling (Bill Selling Rate)

The Bill Selling rate is applied for transactions involving transfer of proceeds of import bills.

Foreign Exchange Delivery

The foreign exchange quotation will also be determined by the date of delivery i.e. the date on which the transaction is completed. The delivery under a foreign exchange contract can be made in one of the following ways:

Type of Transaction Explanation Date of Deal Value Date
Cash / Ready Delivery on the same day i.e. on the deal date 03 Dec 2018, Monday 03 Dec 2018, Monday
TOM Delivery made on the next working day after deal date 03 Dec 2018, Monday 04 Dec 2018, Tuesday
SPOT Delivery on the second working day after deal date 03 Dec 2018, Monday 05 Dec 2018, Wednesday
Forward Delivery subsequent to SPOT date 03 Dec 2018, Monday Any date after 05 Dec 2018

Computation of Rates

The Bank is a trader in foreign exchange. Purchases are made at a lower price and the sale at a higher price, with the differential being the exchange profit. Banks arrive at a quote based on base rate, exchange margin, spread, and forward premium.

Base Rate

Base rate is the rate derived from ongoing interbank spot rates. For merchant transaction on cash basis (i.e. value Today), the base rate will be adjusted to the extent of cash/spot differences.

Exchange Margin

Banks adds exchange margin above the base rate for quoting rates for different types of merchant transactions e.g. TT Buying/Selling, Bill Buying/Selling etc.  Margin offered to the importers/exporters differs based on overall relationship value, volume in foreign exchange etc.

Spread

Spread is the difference between TT Selling rate and TT Buying rate of a given currency. FEDAI has stipulated that the spread should not exceed the following limit from the mean rate:

USD 1%
GBP, EURO, AUD, CHF, JPY 2%
All other currencies Minimum possible spread

TT Buying Rates

USD INR 70 / 70.05
Base Rate in TT Buying Rate 70
Cash / Spot Difference -0.02
Less: Exchange Margin -0.05
Rate for Exporter 69.93

Bill Buying Rates (OD Buying)

USD INR 70 / 70.05
Base Rate 70
Add premium/deduct discount as the case may be, for the period of delivery/realisation.
Premium for 3 months say Rs.0.60
+0.60
Less: Exchange Margin -0.05
Rate to Exporter 70.55

TT Selling (Outward Remittance)

USD INR 70 / 70.05
Base Rate in TT Buying Rate 70.05
Cash / Spot Difference – 0.02
Plus: Exchange Margin +0.05
Rate for Importer 70.08

BC Selling (Bill Selling Rate)

USD INR 70 / 70.05
Base Rate in TT Buying Rate 70.05
Cash / Spot Difference -0.02
Plus: Exchange Margin +0.15
Rate for Importer 70.18

Hours of Business

The hours during which forex business will be transacted are the normal banking hours of AD branches expect on Saturdays and Sunday.

Reference

  1. HDFC Bank Forex Rates
  2. Financial Benchmarks India Pvt Ltd
  3. Exchange Rate Mechanism

Legal Entity Identifier (LEI) Number

What is Legal Entity Identifier (LEI) ?

The LEI is a 20-digit, alpha-numeric code that identifies legal entities participating in financial transactions. Each LEI is unique and contains reference information that enables simple and quick identification of an entity. As an international standard (based on ISO 17442), all LEI information is openly published and accessible to all.

Continue reading Legal Entity Identifier (LEI) Number

Stronger Rupee Impact on Buyers Credit

Currency fluctuation is one of the factor effecting  Buyers Credit.

Chart: www.xe.com

From 62 Level starting 2015, USD INR moved to 68 levels and since then has come back to 64 levels in 2017. This article explores impact of stronger rupee on importers who have availed buyers credit.

Continue reading Stronger Rupee Impact on Buyers Credit

Banks Insisting of Forward Booking for Buyers Credit Exposure

Of late few banks have started asking their clients to compulsorily book forwards against  their buyers credit exposure (existing as well new transactions). This change is because of earlier and current directives given by Reserve Bank of India (RBI). Summary of which is given below:

Continue reading Banks Insisting of Forward Booking for Buyers Credit Exposure

Comprehensive Guidelines on Foreign Exchange Derivatives

RBI via circular dated 28/12/2010 revised the extant guidelines on OTC (Over the Counter) Foreign  Exchange Derivatives and which became effective from 1st February 2011. Below is the extract of the guidelines related to importers and exporters.

Continue reading Comprehensive Guidelines on Foreign Exchange Derivatives

Recent Changes to India’s Currency Forward Contract Norms for Hedging

RBI via circular dated 15/12/2011 made changes in Foreign Exchange Derivative Contacts with immediate effect until further review. Below is the extract of the same related to importers and exporters.

Continue reading Recent Changes to India’s Currency Forward Contract Norms for Hedging