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๐‚๐ฅ๐š๐ซ๐ข๐ญ๐ฒ ๐ข๐ง ๐‚๐ฎ๐ซ๐ซ๐ž๐ง๐œ๐ฒ: ๐๐ž๐ž๐ ๐Ÿ๐จ๐ซ ๐ ๐ซ๐ž๐š๐ญ๐ž๐ซ ๐ฉ๐ฎ๐›๐ฅ๐ข๐œ ๐œ๐จ๐ง๐ฌ๐ฎ๐ฅ๐ญ๐š๐ญ๐ข๐จ๐ง ๐š๐ง๐ ๐œ๐จ๐ฆ๐ฆ๐ฎ๐ง๐ข๐œ๐š๐ญ๐ข๐จ๐ง ๐›๐ฒ ๐‘๐ž๐ ๐ฎ๐ฅ๐š๐ญ๐จ๐ซ๐ฌย 

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In the fast-paced world of currency trading, clarity and communication are paramount. However, recent events in the Exchange-Traded Currency Derivative (ETCD) market have potentially left retail traders reeling from confusion. The genesis of this goes back to the beginning of 2024 when theย Reserve Bank of India (RBI)ย issued revised Master Directions on โ€˜Risk Management and Inter-Bank Dealings โ€“ Hedging of foreign exchange riskโ€™ which were to come into effect on April 05, 2024.
ย 
Initially, the new directives appeared to align closely with their predecessors, seemingly serving a clarificatory purpose. However, concerns have arisen among market participants in recent times. This may stem from subtle alterations introduced by the RBI. For instance, while the requirement concerning the establishment of underlying exposure, capped at a single limit of USD 100 million, remained consistent with the previous version of the Master Directions, the new guidelines included a clarificatory note. This note emphasizes that Recognized Stock Exchanges must inform users that although they are not obligated to establish the existence of underlying exposure, they must ensure the presence of a valid underlying contracted exposure, un-hedged by any other derivative contract, and be prepared to substantiate it if necessary.
ย 
Furthermore, the RBI has revised the definition of โ€˜contracted exposureโ€™ to specify that it excludes exposures arising from derivative transactions undertaken for purposes other than hedging. Essentially, only transactions between residents denominated in a foreign currency or linked to a foreign currency or benchmark, but settled in INR, would be recognized as a contracted exposure, implying that speculative transactions would not be permissible.
ย 
However, the RBI recently has issued a press release clarifying that that the regulatory framework for ETCDs has remained consistent over the years and that there is no change in the RBIโ€™s policy approach. Further, it also extended the operative date of the new master directions from April 05, 2024 to May 03, 2024.
ย 
The above issue has again emphasized the need for a more holistic consultative process required to be undertaken by the Regulators before issuing regulatory measures. However, it has also emphasized a need for clear and early communication between the three parties involved viz. the Regulator, Market Participants and Investors.
ย 
A copy of the RBI Press Release is enclosed herewith.

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