RBI issues directions on Hedging of Commodity Price Risk and Freight Risk in Overseas Markets

A.P. (DIR Series) Circular No. 19

March 12, 2018


All Category – I Authorised Dealer Banks

Madam / Sir,

Hedging of Commodity Price Risk and Freight Risk in Overseas Markets
(Reserve Bank) Directions

Attention of Authorised Dealer Category – I (AD Category-I) banks is invited to regulation 6 and 6A of the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000 dated May 3, 2000 (Notification No.FEMA. 25/RB-2000 dated May 3, 2000) issued under clause (h) of sub-section (2) of Section 47 of FEMA, 1999 (Act 42 of 1999), as amended from time to time.

2. RBI had earlier constituted a Working Group to review the guidelines for Hedging of Commodity Price Risk by Residents in overseas markets (Chairman: Shri Chandan Sinha). Based on the report of the working group and comments received on the report, draft directions for hedging of commodity price risk and freight risk were released for comments on Jan 12, 2018. Based on the feedback to the draft directions, the Hedging of Commodity Price Risk and Freight Risk in Overseas Markets (Reserve Bank) Directions, 2018 have been finalized and are enclosed herewith. The revised directions shall come into force from April 1, 2018.

3. Residents hedging their commodity price risk and freight risk under a specific approval from RBI given under the approval route based on the previous set of guidelines would be permitted to continue hedging under the said approval till June 30, 2018 or the last date specified in the approval, whichever is earlier.

4. The relevant instructions on the subject contained in the following circulars stand withdrawn as on April 1, 2018:

  1. A. P. (DIR Series) Circular No. 68 dated January 17, 2012 on “Risk Management and Inter-Bank Dealings – Commodity Hedging”
  2. Section E and F of A. P. (DIR Series) circular no. 32 dated December 28, 2010 on “Comprehensive Guidelines on Foreign Exchange Derivatives and Overseas Hedging of Commodity Price and Freight Risks” and the relevant appendices.
  3. A. P. (DIR Series) Circular No.35 dated November 10, 2008 on “Remittance related to Commodity Derivative Contract Issuance of Standby Letter of Credit / Bank Guarantee”

5. AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

6. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions /approvals, if any, required under any other law.

Yours faithfully

(T. Rabi Sankar)
Chief General Manager

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