SEBI revises underlying exposure limits for currency derivative contracts

The Securities and Exchange Board of India (SEBI), the regulator of the Indian stock market, has tightened the rules for positions that can be held in rupee-related currency derivatives. According to a report by Mint, SEBI has now fixed a consolidated limit of 5 million dollars for domestic clients and Foreign Portfolio Investors (FPIs) across all currency pairs and stock exchanges. Underlying exposure will not be required to be established for positions up to this limit.

In a circular issued on Thursday, SEBI revised the existing provisions regarding positions in currency derivatives. This step has been taken to align with the revised threshold limits announced by the Reserve Bank of India (RBI) on October 10. Previously, the RBI had set the limit for rupee-related currency derivatives exposure at 100 million dollars. Under the new rules, instead of counting individual contracts separately, all rupee-related currency pairs have been brought under a single consolidated limit.

According to the new framework, domestic clients and FPIs can take long or short positions up to 5 million dollars in notional value across all recognized stock exchanges and all currency pairs at any time, for which there is no need to show underlying exposure. Underlying exposure may include payments to be made or amounts receivable in foreign currency, which need to be hedged.

Certain special conditions have been kept in these rules for FPIs. Their short positions in all contracts of foreign currency-rupee pairs across all exchanges cannot exceed 5 million dollars. However, FPIs wishing to take long positions exceeding this limit must establish underlying exposure in Indian debt or equity securities, including units of equity and debt mutual funds.

Underlying exposure refers to an actual financial requirement or investment that supports the currency derivative position. For example, an importer who has to make a payment in dollars in the future or an exporter who is to receive an amount in foreign currency can use derivatives to reduce exchange rate risk.

These revised provisions will replace the threshold limits under SEBI's master circular for stock exchanges and clearing corporations dated December 30, 2024. SEBI stated that all other requirements, conditions, and rules under the previous master circular will remain unchanged, except where modified by the latest circular or directed by SEBI.

Stock exchanges and clearing corporations have been directed to set up the necessary systems, make required amendments to their rules and regulations, and communicate these revised provisions to stockbrokers and clearing members. This circular follows comprehensive revisions by the RBI in the rules for rupee-linked foreign exchange derivatives, which also include requirements related to the cancellation, re-booking, and hedging documents of contracts.