MAIN FUNCTIONS OF THE FRONT OFFICE ( DEALING ROOM )
a) Function as a Service Branch to meet the requirement of customers of other
branches, to buy or sell foreign currency. Dealers give views on the market
movements which help the customers to take decision on their Forex positions.
b) Maintain the forex funds position as well as the currency position (exchange
position) within the limits specified by the Bank management.
c) Fund and manage Nostro A/c. Forex fund manager manages the Nostro in such a
way that adequate balance is maintained to honor the commitments and at the
same time avoid interest loss by keeping idle fund.
d) Manage the gaps in the forwards within the specified limits. The difference
between the inflow and outflow of funds on a particular date in the forwards is
referred to as the gap. Limits are specified by the management for gaps within a
month (Individual Gap Limit – IGL) as well as total gap (Aggregate Gap Limit –
AGL) for all the months together (normally up to twelve months).
e) Manage Foreign Currency Assets / Liabilities of the bank.
f) Undertake proprietary trading keeping in mind the limits laid down by the Bank
management for the purpose, such as currency daylight position limits, overnight
open position limits, cut loss limits etc. Proprietary trading means dealers taking
positions (buy or sell currencies), based on their views with the intention to make
profit.
g) Act as a separate profit centre. For all banks, Forex dealing room is a contributor
to the bottom line.
The code of conduct for dealers prescribed by FEDAI lays down that the dealers
should not account for the deals done by them. This is to prevent any fraud on the
part of dealers and also tendency to favour brokers of their choice. The accounting
for the deals put forth by the dealing room is done by the back office.
MAIN FUNCTIONS OF THE BACK OFFICE
a) Takes care of processing of deals concluded by dealers.
b) Confirmation of deal with the counter party and settlement of fund on due date.
c) The Back office also keeps a watch over the dealers to ensure that they are not
overtrading, or favoring a particular broker and so on.
d) Accounting: This has to be done with utmost care as any wrong accounting can
result in huge loss of money as well as reputation in the market.
e) Reconciliation of Nostro accounts is equally important and has to be done on a
continuous basis. Lapses in reconciliation are fraught with risk of loss.
f) The Back Office also revalues the foreign exchange positions taken by the
dealers at the end of each month based on the rates announced by FEDAI, to
evaluate the notional exchange profit/loss at that point of time. The Nostro mirror
accounts, foreign currency notes held, outstanding export bills, import suspense
account are also to be revalued as per guidelines.
MAIN FUNCTIONS OF MID OFFICE
a) Risk Management
b) Compliance (Govt/RBI/FEDAI/Bank’s instructions and directions)
c) MIS
d) Providing relevant market information.
FOREIGN EXCHANGE TRANSACTIONS
Purchase Transactions
When the Bank receives foreign exchange from a customer, it is a purchase transaction.
These can be in the form of inward remittances, purchase of export bills/ cheques or
purchase of travelers’ cheques/currency notes. The foreign exchange thus bought from
the customers is in turn sold by the Bank in the foreign exchange market in marketable
lots. Higher the market lot amount the better will be the rate as it will be easier to sell.
The rate quoted by the Bank to the customer will be the market rate minus a margin
which will cover the cost of operations plus some profit.
For Inward remittance, where Nostro is already credited, the rate to be applied is TT
Buying rate.
For exports also if Nostro is already credited, the rate to be applied is TT Buying rate
(this normally happens when bills are taken for collection and conversion takes place
after realization).
TT Buying Rate is applied for the following transactions also: (i) FCNR closure and credit
to NRE/NRO account (ii) Cancellation of DD already issued in Foreign Currency (iii)
Forward Sales Contract (FSC) cancellation (iv) When collection (cheques/ export bills)
items are realized. .
For Export bill purchasing/ discounting/negotiating where the amount will be credited to
the Nostro account only subsequently, the rate to be applied is Bills buying rate. From
the customers’ point of view the Bill buying rate will be slightly worse as it will also
include the interest for the days between the date of purchase and the date of credit of
forex amount to the Nostro (value date).
Sales transactions
For DD/TT the rate to be applied is TT Selling rate.
This is because; banks have to make available the required funds in the Nostro
immediately on issuing TT/DD.
TT Selling Rate is applied for following transactions also:
(i) Opening FCNR account with fund in NRE a/c
(ii) Export Bill crystallization
(iii) Forward Purchase Contract (FPC) cancellation.
For retirement of import bills, the rate to be applied is Bills Selling rate. For import bill
crystallization, Bills selling rate is applied.
Foreign exchange market is a global market, round the clock market, and Monday to
Friday market.
Over Bought Position is the position where the net purchase is more than the sales
(also known as long position). If the currency, in which the dealer is ‘long’, appreciates it
is a gain and if depreciates it will be a loss.
Over Sold Position is the position where the net sales are more than the purchases
(also known as short position). If the currency, in which the dealer is ‘short’ appreciates it
is a loss and if the currency depreciates it will be a gain.
FEDAI
While RBI prescribes detailed guidelines related to open positions, gaps, borrowing and
lending in foreign currencies, interbank dealings in India and overseas and hedging of
bank’s own forex exposures as well as those of its resident and non-resident clients,
FEDAI (Foreign Exchange Dealers’ Association of India), a non–profit making self-
regulatory body formed in 1958 with the approval of RBI, consisting of authorized
dealers as members, prescribes guidelines and rules for market operations, merchant
rates, delivery dates, holidays, interest rate on defaults, etc. It is mandatory for all
Authorized Dealers to follow the guidelines prescribed by FEDAI. Some of the major
guidelines of FEDAI are summarized below.
FEDAI GUIDELINES
1. All export bills are to be allowed Normal transit period (NTP), as prescribed, for
the purpose of allowing concessional interest rates and calculation of notional due
dates.
2. Export bills purchased/ discounted/ negotiated must be crystallized into rupee
liability at the prevailing TT Selling rate, the date of crystallization to be decided by
the Bank based on nature of commodity, country of export etc.
3. Import bills drawn under import letters of credit would be crystallized as per
individual bank’s policy, at the prevailing Bills Selling rate.
4. All forward contracts must be for a definite amount with specific delivery dates.
5. In case of option delivery forward contracts, the option period can be specified by
the customer, but in any case the delivery period under the option contract shall
not exceed one month. All such contracts must state the start and end dates.
6. All forward contracts which have matured but not picked up/ delivered shall be
automatically cancelled on the 3rd working day after the maturity date.
Cancellation of purchase contracts and sale contracts shall be done at the TT
Selling rate and TT Buying rate respectively.
7. In the event of delay in payment of interbank foreign currency funds, interest for
delayed period shall be paid at 2% above the prime rate of the particular currency,
by the Seller Bank.
8. In the event of delay in payment of rupee settlement of funds, interest for delayed
period shall be paid at 2% above the FBIL/MIBOR (Financial Benchmarks India
Pvt. Ltd/Mumbai Inter- Bank Offer Rate) ruling on each day.
9. All currencies to be quoted as “one unit of FC = …………INR” except in the case
of JPY, Indonesian Rupiah, and Kenyan schilling, where it should be quoted as –
“100 units of FC = ………..INR”
10. FEDAI also prescribes code of conduct for dealers, as also guidelines with regard
to dealing with brokers.
CATEGORIES OF AUTHORISED DEALERS
1. Authorized Persons I – Banks / Financial Institution other entities, allowed to
handle all types of forex transactions.
2. Authorized Persons II – Money changer allowed undertaking, Sale/Purchase of
foreign Currency notes / TC – (Full-fledged money changers).
3. Authorized Persons III – Entities allowed only to purchase of Foreign Currency
Notes TC.(Restricted Money Changers). Now these category can act as
Franchisee of AP II
ie the Franchiser, and they have to surrender the currency to them within a period
of 7 days.
RBI GUIDELINES FOR AUTHORISED PERSONS- CATEGORY I (Earlier known as
AUTHORISED DEALERS)
As mentioned earlier commercial Banks fall under the category of Authorised Persons.
The RBI guidelines for this category with respect to operations and risk management
and products that can be offered to clients are listed below.
a) They are allowed to open/close rupee accounts (non-interest bearing) in the names
of the overseas branches or correspondents (except Pakistan Banks operating
outside Pakistan) without prior reference to RBI. (However opening of rupee
accounts in the name of exchange houses for facilitating private remittances through
exchange houses requires prior approval from RBI.)
b) Banks are allowed to open/close foreign currency accounts abroad (Nostro) to route
foreign exchange transactions handled by them. Banks are also allowed to maintain
balances in these accounts as approved by their respective boards.
c) Banks are free to undertake investments in overseas markets in money market
instruments and/or debt instruments, issued by a foreign state with a residual
maturity of less than one year and rated as per guidelines.
d) Surplus funds in Nostro accounts can be utilized to grant loans to resident
constituents to meet their foreign exchange or rupee working capital requirements or
capital expenditure needs. It can be utilized to extend credit facilities to wholly owned
subsidiaries/ joint ventures of Indian companies abroad subject to conditions.
e) All borrowings of Banks and temporary overdrafts in Nostro not cleared within 5 days
shall not exceed 100% of the unimpaired Tier I capital of the Bank or USD 10 million,
whichever is higher.
f) Banks can allow residents to book forward exchange contracts to hedge their
exchange risk exposure in respect of a transaction for which sale or purchase of
foreign exchange is permissible under the FEMA 99. Banks should ensure the
genuineness of the underlying transaction from documentary evidence and the
maturity of the contract should not exceed the tenor of the underlying. (However in
the case of importers and exporters banks can book forward contracts on the basis
of their declaration of an exposure and based on the past performance up to an
average of the past three financial years’ turnover or the previous year’s actual
turnover, whichever is higher).
g) SMEs enjoying credit facilities with the Bank can also book forward contracts without
production of the underlying and in alignment with the quantum of credit facilities.
h) Banks can allow resident individuals banking with them book forward contracts up to
an amount of USD 1,000,000 and up to a tenor of one year.
i) Banks can also offer other derivative products, such as interest rate swap, coupon
swap, foreign currency option, interest rate cap or collar, or forward rate agreement
contract to resident entities who have borrowed foreign exchange in accordance with
the provisions of FEMA 1999. Banks can also offer foreign currency-rupee swap,
cross currency options on a back-to-back basis and foreign currency-rupee options
to their resident constituents subject to conditions.
Risk management is dynamic and needs to remain in constant focus of the users
as well as the top management.
In order to mitigate/ manage the above risks Banks, RBI and FEDAI have issued
guidelines to Banks.
RBI has issued Internal Control Guidelines (ICG) in 2011for foreign exchange
business which covers various aspects of dealing room operations, code of conduct for
dealers and brokers and guidelines for set up of the dealing room, back office and risk
management structure. Under ICG, banks are required to put in place various dealing
limits for their forex operations which are summarized below.
1) Overnight limit: Maximum open position a Bank can keep overnight, when
markets in its time zone are closed. This is called Net Overnight Open Position Limit
(NOOPL)
2) Daylight limit: Maximum position a Bank can hold during the daytime when
markets are open to meet its customer needs as well as trading operations.
3) Gap limits: Maximum difference between receivables and payables in a given
period/ month.
4) Counterparty limit: Maximum amount a Bank can expose itself to a
counterparty.
5) Country Limit: Maximum exposure on a single country.
6) Dealing limit: Maximum amount to which a dealer can take positions during
operating hours.
7) Stop loss limits: Maximum movement in rate against the position held within
which the position is
to be reversed and the loss contained.
8) Settlement limit: Maximum exposure to any entity maturing on a single day.
9) Deal size limit: Highest amount for which a deal can be entered.
Besides the above, the Bank management also approves the panel of forex brokers
through whom deals could be undertaken, the currencies in which the bank can deal in,
“value at risk” limit, nostro balance limit, overdraft limit and so on.
The guidelines also permit banks to hedge the exposures of their customers, and their
own exposures and investments using derivatives such as forward contracts, options,
interest rate swaps and currency swaps.
CCIL
CCIL (Clearing Corporation of India) is an institution created for the purpose of clearing
and settlement of Repos, CBLOs, gilts and interbank forex deals. CCIL acts as a
Central Counter Party (CCP) and takes over the settlement risk of banks in India who
are their members. It settles the funds on a net basis. For interbank forex settlement, it
handles USD/INR deal settlement with netted amounts being paid/ received from the
participants/banks, provided it is within the pre-approved Net Debit Cap limit sought by
the participating bank.