Mumbai, April 12, 2017

RBI has allowed IFSC banking units (IBUs) to engage in derivative transactions

In a step to boost activity in international financial services centres (IFSCs), the Reserve Bank of India has allowed IFSC banking units (IBUs) to engage in derivative transactions.

An IBU can become a member of the exchange in an IFSC to trade in interest rate and currency derivatives.

IBUs may carry out derivative transactions, including structured products that the banks operating in India have been allowed to undertake. However, they shall obtain RBI’s prior approval for offering any other derivative products, RBI said in a notification on Monday.

Banking units can become a professional clearing member (PCM) of an IFSC exchange for clearing and settlements in any derivatives segment.

The IBU may, as a PCM of derivatives segment, guarantee trades executed by its clients as trading members of the exchanges. The total exposure which the bank would take on its registered clients should be determined by the Board in relation to the net worth of the bank and monitored regularly.

However, the IBU should not guarantee any transaction other than what is required in its role as a PCM.

RBI has also permitted IBUs to extend bank guarantees and short- term loans to IFSC stock broking/commodity broking entities. The fixed deposits accepted from non-banks by the IBUs cannot be repaid pre-maturely within the first year. However, fixed deposits accepted as collateral from non-banks for credit from IBUs or deposited as margin in favour of an exchange can be adjusted prematurely if the client defaults in repayment of the loan or meeting a margin call.

[The Business Standard]