RBI issues fresh guidelines for derivatives

Inviting suggestions from stakeholders, the draft comprehensive guidelines suggests that all derivatives transaction should be sequentially controlled.

Seeking to simplify derivative transactions and minimise risks to banks, which have been increasingly using derivative instruments to hedge risks, RBI on Monday issued a draft circular that mooted having an audit trail of such trades and a system to track errors and frauds.

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Inviting suggestions from stakeholders, the draft comprehensive guidelines suggested that all derivatives transaction should be sequentially controlled to ensure that all deals are accounted for and to provide an audit trail for deals affected.

"Deals should be transacted at market rates," the circular said, while discouraging use of off-market rates as a base for renewal of maturing derivatives contract.

However, off-market rates could be used as an exception if the customer has specifically requested for it.

As regards settlement and disbursement procedure it said, specific procedures should be established for initiation of fund transfer.

RBI said that data, reports and systems pertaining to transactions should be reconciled to ensure that institutions official books agree with dealer's records.

To track errors, frauds and losses the back office should generate management reports that reflect current status and trends for outstanding general ledger reconciling items, failed trades, off-market trades, aging of unconfirmed trades, suspense items, brokerage payments and miscellaneous among others.