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RBI issues draft norms on hedging commodity price, freight risks

Mumbai, January 12:  

The Reserve Bank of India on Friday released draft directions on hedging of commodity price risk and freight risk in overseas markets, whereby the decision regarding the quantity and tenor to be hedged is proposed to be delegated to the client.

Also, introduction of a facility for hedging of indirect price risk for selected metals is being envisaged.

Hedging is the activity of undertaking a derivative transaction to reduce an identifiable and measurable risk such as commodity price risk and freight risk.

The conditions

The RBI said structured derivatives may be permitted to eligible entities (resident entities other than individuals) that are listed on recognised domestic stock exchanges and fully-owned subsidiaries thereof or entities whose net worth is higher than ₹200 crore, subject to conditions.

The conditions that have been specified are: there should be no net inflow of premium, direct or otherwise; no leveraged products should be used; no derivatives involving another derivative as underlying should be used; and no exotic derivative products are used.

The RBI said all payments/receipts related to hedging of exposure to commodity price risk and freight risk shall be routed through a special account with the bank for this purpose.

(This article was published on January 12, 2018)

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