Transcript General Bank Management (CAIIB) International Banking (Module A) – PART-I Foreign Exchange R N Hirve Chief Manager International Division Mumbai 29th November 2008 Contents of Module A        RBI and exchange.

General Bank Management
(CAIIB)
International Banking (Module A) – PART-I
Foreign Exchange
R N Hirve
Chief Manager
International Division
Mumbai
29th November 2008
Contents of Module A
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RBI and exchange control in India
ICC, FEDAI, ECGC, EXIM Bank#
Exchange rates
Risk management and basics of derivatives#
Documentary letters of credit
Facilities for exporters and importers#
Correspondent Banking
EXCHANGE CONTROL IN INDIA
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FEMA 1999- W.E.F. 1ST JUNE 2000
ORIGIN IN DEFENSE OF INDIA RULES (DIR) 1935
CONTROL TO CONSERVE FEX DUE TO SEVERE
CONSTRAINTS ON FOREX RESERVES DUE TO II ND
WORLD WAR
23 MAR 1947 THESE RULES BECAME FERA 1947
MODIFIED/AMENDED-FERA 1973 W.E.F 1.1.1974
FURTHER RALAXATIONS SINCE 1994.
FCRA 1976- [permission from Min.Of Home Affairs to
receive FC – HC/DC Judge, Newspaper Editor,
Publisher, Columnist, Printer, Political party leader,
Office Bearer, Candidate for election, Charitable
Trust]
FEMA
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V/S
FEMA (49 Sections)
Plays a role of facilitator
which regulates &
manages of FE
transactions
Civil Act.- prosecution to
prove guilt
NRI status
Penalty
Regulation, Discretion &
Permission
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FERA
FERA (81 sections)
Acted as controller for
Conservation of FE
Criminal Act- accused to
prove innocence
NRI status not
compatible with IT Act
Penalty & prosecution
Only regulation
FOREX TRANSACTIONS
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4 D – TRADE CONTROL, EXCHANGE CONTROL,
BANK’S INTERNAL GUIDELINES, KYC
IMPORTANT SOURCE OF OTHER INCOME FOR
BANKS – INTEREST/COMMISSION/EXCHANGE
IMPORTS
EXPORTS
INWARD/OUTWARD REMITTANCES
FC A/CS: EEFC/RFC/ESCROW/FCNR-B
FCLS
FOREX DEALING/TRADING OPERATIONS
Receipt/Payment/Borrowing/Lending in FX
FEMA 1999
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How to receive FX :
Exports + IRS + Borrowings + Inbound
Investments
How to remit FX:
Imports + ORS + Lending + Outbound
Investments
Capital Account
Residents
Creation of Assets/Liab. Outside INDIA
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Non Residents
Creation of Assets/Liab. In INDIA
Capital A/C ( Contd.)
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Inflow -- Equity Debt &Assistance
ECB/ADR/GDR/FDI/FII/NR
INV.EXT..assistance to INDIA
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Out flow
Repayment of loans,Repatriation of
capital,Foreign investments by
Residents./EXT. Assistance by INDIA
Current A/C
( Full convertible since 19/08/1994Trade a/c flows, Misc payments, annual accruals- intt, dividend &
profit)
Inflow
Export of goods & services – travel,
insurance, investment , transport income,
compensation to employees etc
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Outflow
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Import of goods & services travel, insurance,
investment , transport income, compensation
to employees etc
CURRENT A/C TRANSACTIONS
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SCHDULE I- Prohibited
Eg. Remittance of lottery winnings, Racing,
purchase of lottery tickets etc.
SCHDULE II- Permitted by Ministry/Deptt .Eg.
Cultural tours-HRD-Dept of Education & Culture,
Remittance of freight of vessel chartered by a PSUMin of Surface Transport etc
SCHDULE III - Permitted by RBI
Eg. Gift /Donation exceeding USD 5000, release of
exchange in excess of USD 10,000 or eq. in one
financial year( April-March) [i/o one calendar year]
for one or more visits to any country except Nepal
& Bhutan, etc.
BOT & BOP
BOT
Current a/c inflows – outflows
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BOP
Current a/c + Capital a/c
BALANCE OF TRADE
$ in BN
(Yr/March)
08
07
06
05
04
03
EXPORTS
155.51 126.41 100.61
79.24
61.84
52.74
IMPORTS
235.91 185.74 140.23
107.06
75.21
60.19
Trade deficit
-80.40
-59.33
-39.62
-27.82
-13.37
- 7.45
51.7
47
39
35
22
TD as % of EXP
14
Growing Foreign Exchange Reserves
48.847.5
46.64
300
280
42.5 43.6
260
240
220
56
309.72 313
320
35.5
45.6
44.62
43.7
50.25
49
43.44
42.64
251
42
37.2
33.5
199.17 39.9
200
35
180
28
151.62
160
141.30
140
21
120
100
75.43
80
60
40
20
17
22
26
30
38 42.26
112.96
14
54.15
7
0
0
1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
16- 20-NovMay-08
08
RBI - IECD/FED/DBOD
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FEMA 99
Inflow & Outflow of F/C
Maintenance of FC reserves
Issue of license to A.D.
Inspection & Supervision
Monitoring – R returns, XOS,BEF etc
Master Circulars
AP (DIR) Circulars
Intt. Rates on Export Credit
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Guidelines & Rules for FX Business (FEDAI Rule book)
Training of Bk personnel in areas of FX Business
Accreditation of Forex Brokers
Code of Ethics & Conduct for Forex Dealers & Brokers
Advising/assisting member banks in settling issues/matters in their dealings
Code on Bank’s Commitment to Customers (CBCC)- Intt for delay in payment of
Inward remittance beyond 10 days @ 2% over Savings rate ( USD 5000/USD
5000 and above)
Represent member banks on Govt/RBI/other bodies
Accounting standards/Closing Rates/ Revaluation of Mirror a/cs & outstanding
cont
CONCERNED MINISTRIES
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Ministry of Commerce
Inflow and outflow of goods & Services
(DGFT- FT Policy)
 Ministry of Finance
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Inflow and outflow of F/C
(Customs/Excise/ED/RBI/Exim Bank/ECGC/Banks/0FIs)
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Ministry of I.T.
Accreditation of software units
Promotion of software exports/STP/HTP
Export Credit Guarantee Corporation of
India Ltd. (ECGC)
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It was set up for the promotion of exports in
the year 1957.
To protect the exporters from any financial
loss.
Primary goal of ECGC :
To support & strengthen the export
promotion drive in India by providing a range
of credit risk insurance covers to exporters
against loss in export of goods and service
also by offering guarantee covers to banks
and financial institutions to enable exporters
to obtain better facilities from them.
ECGC
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Credit Guarantee cover
WTPCG- in f/o banks
WTPSG- in f/o banks
POLICIES- in f/o exporters
Status Report on overseas buyers
Other market players
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Insurance companies
Transporters
Chamber of commerce
Exporters/Importers
Interest Rates
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PCFC:LIBOR + 100 BP
PC:BPLR- 2.5% Upto 270 days
ECB: 3 to 5 yrs: LIBOR + 300 bps more than 5 yrs+500bps
FCNR interest ceiling : LIBOR/SWAP rates prevailing on the
last working day of the previous month plus 100 basis
points** w.e.f. 15th Nov 2008
FCNR now in 6 currencies- USD/GBP/EUR/JPY/AUD/CAD*
Max 5 years* (* Ref DBOD cir 26/07/2005)
NRE interest rate ceiling: LIBOR/SWAP RATES FOR USD of
corresponding maturities prevailing on the last working day of
the previous month plus 175 bps w.e.f 15th Nov 2008 –**
FEDAI would quote/display these rates fm FEB 2006 –Ref
DBOD circular dtd 8 Feb 2006
NRE SAVINGS: At the rate applicable to domestic deposit rates
w.e.f. 17 Nov 2005
Correspondent Banking
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Relationship to be established by approval of
the Board or delegated by Board headed by
Chairman/CEO.
To be placed before the Board in next Board
meeting for post facto approval
To understand details about Bank’s
management, Major Business Activity, level of
AML compliance, purpose of opening account,
regulatory/supervisory frame work in the
country of correspondent bank etc.
USA PATRIOT ACT &
Correspondent Banking Guidelines
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United and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct
Terrorism
Prohibition on Correspondent Accounts for Foreign Shell
Accounts , for Foreign Shell Banks - Section 313
Requirements
–
Terminate relationship no later than ten days
after receipt of notice that the foreign bank has
􀁺 Failed to comply with a summons or subpoena
􀁺 Initiate proceedings in a US court to contest the
summons or subpoena
USA PATRIOT ACT &
Correspondent Banking Guidelines
120 hour rule
– Not later than 120 hours after receiving a
request
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Related to anti-money laundering
compliance at a covered institution or,
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Regarding a customer at a covered
institution
- Covered institution shall provide
 information and documentation for account
opened,
maintained,
administered,
or
managed in the US
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PECULARITIES OF FOREX MARKETS
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An Over The Counter Market
Only market open 24 hour a day
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SYD/TOK/TAIPEI-S’PORE-HK/INDIA/EUR/LON/NY
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1.30PM/12.30PM/11.30AM/9.00AM/5.30AM//4.30AM/11.30
PM-PREVIOUSDAY
No single location – no barriers
Exchange rates fluctuate almost every four
second
Other markets- money, capital, & debt – also
affect forex market
Controls/policies of respective governments also
affect forex markets
Settlement of forex transactions normally do not
take place simultaneously.
Factors Influencing Currency Value
Economic Factors
1.
Balance of Payment
2.
Interest Rates
3.
Inflation
4.
Monetary and Fiscal Policy
5.
International Competitiveness
6.
Monetary Reserves
7.Government Controls and Incentives
8.
Importance of Currency in World
Political Factors
9.
Political Party and Leader Philosophies
10.Proximity of Elections or Change in Leadership
Expectation Factors
11.Expectations
12.Forward Exchange Market Prices
FX Rates
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What is Exchange Rate ?
Exchange Rate is a rate at which one
currency can be exchanged into another
currency.
Foreign Exchange Deal
Involves the sale of one currency and the
purchase of another at an agreed exchange
rate
How Banks quote spot rates to
customers?
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Ascertain the ongoing market rate
Load a margin
Quote
Cover
One of the party to the transaction
must be a bank i.e. AD
SPREAD
THE DIFFERENCE BETWEEN THE
BUYING AND SELLING RATE (BID AND
OFFER RATES) IS KNOWN AS SPREAD
Calculating Cross Rates
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India is a market maker for Indian Rupee
Dollar/ Rupee trading ( the first quotes) start in the
Mumbai Market
BUT WHAT ABOUT OTHER CURRENCIES ?
WHERE DO RATES FOR CHF, GBP, EUR ETC COME
FROM? HOW ARE THEY CALCULATED?
A CHF/RUPEE RATE IS A CROSS OF DOLLAR/RUPEE &
DOLLAR / CHF.
DOLLAR / RUPEE = 45.35/36
DOLLAR / CHF = 1.3440 / 45
CHF / RUPEE = 33.73 / 75
In other words, 45.36 / 1.3440 = 33.75 AND
45.35 / 1.3445 = 33.73
Calculating Cross Rates … 2
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FOR GBP ( EUR , AUD ) / RUPEE RATE
CROSS RATE IS ARRIVED AT BY
MULTIPLICATION
DOLLAR / RUPEE = 45.35 / 45.36
x
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GBP / USD =
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GBP/ RUPEE = 81.45 / 81.49
x
1.7960 / 1.7965
Forward Rates
 What is a Forward Rate ?
 Rate agreed for settlement on an agreed
date in the future
 All rates are derived from Spot rates
 Forward rate is the spot rate adjusted for
the premium / discount
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Forward Rate = Spot Rate + / - premium
or discount
Forward calculation ( examples )
Is the forward rate, the market’s expectation
of future spot rates ?
FOREX FORWARDS
CONTRACT BETWEEN TWO PARTIES TO
EXCHANGE CURRENCIES AT AN AGREED RATE
ON AN AGREED DATE
FOR EXAMPLE :
Bank A agrees to buy from RIL USD 1 mio at 43.73
INR per $ ON 29th SEP 2005
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Determining
Rates by
Forward
ratesForward
are determined
adding/subtracting the premium/discount from
the spot rates
E.g The Dollar is at a PREMIUM to the Rupee
Hence, the Dollar is more expensive to buy at a
future date
If the Spot USD
= 43.70
ADD 3 months fwd Premium
= 00.06
USD/INR 3 MTH FWD
= 43.76
The USD is at a DISOCUNT to the JPY
Hence, the Dollar is cheaper to buy at a forward
date
If the Spot USD/JPY
= 108.80
DEDUCT 3 months fwd discount = 0.40
USD/JPY 3 month forward
= 108.40
FOREX FORWARDS
As per FEMA 1999 one of the parties has to
be an AD
The contract could then be between an AD &
its customer
OR between two ADs
The former is the RETAIL segment while the
later is the WHOLESALE segment
VALUE DATE
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IN FOREIGN EXCHANGE MARKET IT
TAKES SOME TIME TO PROCESS THE
TRANSACTION AND SEND INSTRUCTION
TO THE CORRESPONDENT
BANK/BRANCH ABROAD.
THEREFORE IT IS CUSTOMARY TO
QUOTE A RATE TO DO THE DEAL EVEN
THOUGH EXCHANGE OF THE
CURRENCIES DOES NOT TAKE PLACE ON
THE SAME DAY.
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VALUE DATE IS THE DATE
ON WHICH THE EXCHANGE
OF CURRENCIES ACTUALLY
TAKES PLACE.
THIS IS
IRRESPECTIVE
OF
THE
DATE OF DEAL.
Basic Terms used
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Nostro a/c
Vostro a/c
Mirror a/c- reflection of Nostro a/c – maintained in FC and eq.
rupees of the same- reconciliation of nostro a/c
Card Rates/ Notional Rate/ Indicative Rate
Opening/ Closing/High/Low Rates
Interbank Rate/ Screen Rate
Revaluation Rate/ Closing Rate ( FEDAI )
LIBOR
Pipeline Transactions
Overdue contracts
Nostro/Vostro Reconcilaition
Basic Terms Used
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Exchange Position: The difference between the amount of
a currency bought and the amount of the same currency sold
is known as “position” in that currency.
Overbought Position: If the amount of FC bought by a
bank is more than the amount sold, the difference between
the two is “Overbought/Long/Plus” position
Oversold Position: If the amount of FC sold by a bank is
more than the amount bought, the difference between the
two is “Oversold/Short/Minus” position.
Square Position: If the amount of FC bought by a bank
equals the amount sold, then the bank is said to have
“square” position. If there is a small difference, it is known as
“Near Square position”
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Open Position: Exchange position at given point of time
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O/N Position : Open Exchange position at the end of the
ORGANISATION OF DEALING
ROOM
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FX dealing – a highly specialised function
Need to have well trained personnel for front
office to deal with branches, customers &
other banks
Back office responsible for the follow-up of
the deals made by the dealers
Effective control over the dealing operations
is of great importance as possibilities exists
for manipulation of exchange rates, dealing
positions, mismatches etc.
RBI’S ICG – FX BUSINESS
SEGREGATION OF DUTIES
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Front Office- Dealing Room
Mid- Office- Risk Management,
Accounting Policies & MIS
Back Office- Settlement, Reconciliation,
Accounting
Exchange traded currency futures
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U S $ - INR currency futures contract
Contract to be quoted in rupee terms. Outstanding
position in dollar terms
Minimum contract size $1000
Maximum maturity of 12 months
Available contracts maturities from 1 to 12 months
Settlement in cash in Indian rupee at Reserve Bank
reference rate
Settlement date: last working day (excluding
Saturdays) of the month
Trading time 9 to 5 p.m.
Convenient lot size and standardized contracts
Currency futures segment – in a recognized
exchange
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Eligible Net worth Rs.100 crore for exchange.
At least 50 members for currency derivatives segment
Operations, structure and capability
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Trading membership
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A distinct company as independent clearing corporation
Nationwide trading terminal
Online screen based trading system with disaster recovery site
Separate trading and order driven platform from other segments
Separate governing council
Net worth Rs. 1 crore for trading member,
Rs. 10 crore for clearing member
Trading members and sales persons to be accredited by certification
FIIs and NRIs would not be permitted to trade
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Three exchanges in the initial stage
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NSE, MCX,BSE.
INTERNATIONAL TRADE SETTLEMENT AND
PAYMENT SYSTEM
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Advance Payment
Open Account / On Account
Sales – Consignment Basis
Collection Method
- Documentary Collection
* Demand Bills
* Usance Bills
- Clean collection
Documentary Credit / Letters of Credit
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Factoring
On
V/s
going arrangement
Open
account sale
Provides
other than financing
Forfaiting
Single transaction based
LC or bank acceptance required
Primarily a financing service
services
Used
for offering short term credit
to regular buyers (up to 180 days)
Both
For
No
with and without recourse
For medium / long term transaction
which could be “one-off” (90 days to 7years)
Is without recourse
domestic and export receivables Usually for export receivables
minimum size
Transaction should be minimum USD
100,000
DOCUMENTARY CREDITS
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An arrangement at the request and on
instructions of a customer
To make payment / authorise other bank
to pay or negotiate
Against stipulated documents
Provided terms and conditions are
complied with
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ART 4:
TRIANGULAR CONTRACTUAL
ARRANGEMENT
SALE
CONTRACT
DEFINING
TERMS
EXPORTER
IMPORTER
L/C
APPLICATION
ADVICE OF
OPENING
LETTER OF
CREDIT
ISSUING
BANK
ADVISING
BANK
ISSUANCE OF
THE LETTER OF
CREDIT
47
PARTIES TO DOCUMENTARY CREDIT
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Applicant (Opener / Importer)
Issuing Bank
Beneficiary (Exporter)
Advising Bank
Confirming Bank
Negotiating Bank
Reimbursing Bank
48
TYPES OF CREDIT
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Revocable / Irrevocable
Confirmed
Restricted / Unrestricted
Transferable
Back-to-back
Revolving
Deferred
Red Clause / Green Clause
Standby
49
INTERNATIONAL TRADE –
ICC’S PUBLICATIONS
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International
Standard
Banking
Practice (ISBP) – for the examination
of documents under Documentary
Credits – Publication No.681
International Standby Practices (ISP
98) – Publication No.590
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INTERNATIONAL TRADE –
ICC’S PUBLICATIONS
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Uniform Customs and Practice for
Documentary Credits – UCP 600
and
Supplement to UCP 600 for electronic
presentation (eUCP 1.1 version)
Uniform Rules for Bank-to-Bank
Reimbursement (URR 525/725)
51
INTERNATIONAL TRADE –
ICC’S PUBLICATIONS
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Uniform Rules for Collection (URC
522)
INCOTERMS 2000
Uniform
Rules
for
Demand
Guarantees (URDG) – Publication
No.458
52
THE STRUCTURE OF INCOTERMS 2000
4 Groups of terms
Group E :
Departure
EXW EX Works (….named place)

Group F
:
Main Carriage Unpaid
FCA Free Carrier (…named place)
FAS Free Alongside Ship (…named place)
FOB Free On Board (…named port of shipment)
Group C
:
Main Carriage Paid
CFR Cost and Freight (…named port of destination)
CIF Cost Insurance and Freight (…named port of destination)
CPT Carriage Paid To (…named place of destination)
CIP Carriage Insurance Paid To (…named place of destination)
Group D
:
DAF Delivered at Frontier (…named place)
DES Delivered Ex Ship (…named port of destination)
DEQ Delivered Ex Quay (…named port of destination)
DDU Delivered Duty Unpaid (…named place of destination)
DDP (Delivered Duty Paid (…named place of destination)
53
UCPDC – UNIFORM CUSTOMS AND
PRACTICE
FOR DOCUMENTARY CREDITS
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Universally recognised set of guidelines governing Letters of Credit
Brochure framed by ICC, HQ at Paris.
ICC – World Business Organisation of non-govt. nature working
towards Trade Liberalisation, Free & Fair competition
1933 – revised in 1951, 1962, 1974, 1983,1993
Latest Publication No.600, 2007 revision adopted w.e.f. 01/07/2007
L/C being one of the safe methods of settlements is commonly
used in trade, hence UCPDC has become indispensable.
Constructive delivery of goods since matching physical delivery with
payment is not possible.
By handing over documents or transferring title or to control over
the goods is possible under L/C mechanism.
UCPDC balances the interests of all parties to L/C and gives
maximum possible guidance and assistance.
54
The UCP 600 Revision
Some Highlights:
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Fewer articles. UCP600 contains 39 articles. The UCP
500 has 49.
A replacement of the term "reasonable time" with a
definite number of days (5) for examining and
determining compliance of documents;
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A new provision concerning addresses of the
beneficiary and the applicant;
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An expanded discussion of "original documents"; and
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Re-drafted transport articles aimed at resolving
confusion over the identification of carriers and
agents
The UCP 600 Revision
Some Highlights (continued):
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A new section of "definitions", containing terms such as
"honour" and "negotiation“.
Honor means, i) to pay at sight if the credit is available by sight
payment, ii) to incur a deferred payment undertaking and pay at
maturity if the credit is available by deferred payment, (iii) to accept
a bill of exchange (“draft”) drawn by the beneficiary and pay at
maturity if the credit is available by acceptance.
Negotiation means the purchase by the nominated bank of drafts
(drawn on a bank other than the nominated bank) and/or
documents under a complying presentation, by advancing or
agreeing to advance funds to the beneficiary on or before the
banking day on which reimbursement is due to the nominated bank.
Summary of Changes
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The phrase "reasonable time" for acceptance or
refusal of documents has been replaced by a firm
period of five banking days.
The number of articles reduced to 39.
New provisions allow for the discounting of deferred
payment credits.
Banks can now accept an insurance document that
contains reference to any exclusion clause.
New sections on "definitions" and "interpretations"
have been added to clarify the meaning of
ambiguous terms.
Credit must state if reimbursement is subject to the
ICC rules for bank to bank reimbursements.
THANK YOU