http://www.business-standard.com/common/news_article.php?leftnm=2&bKeyFlag=BO&autono=312903&chkFlg= - RBI bars exotic forex products

True banning it isnt the solution ..on their part if the banks dont understand these complex products like curr swaps, intrest  rate swaps etc  its better they stay out till they get a hang of it.

It is not the Banks who do not understand but the customers. Will this ban alos extend to people like Bubble vision who do this for a living. If not then it is good for Bubble but negative for the system.

With this ban, banks will loose loyal customers and their fee income will be hit to a small extent, i suppose.

Thanks for the concern guys, however I would like to confirm that I am NOT impacted any which way. We are from the "Buy side". This would impact the "sell side". Infact, we as a company are happy.

BTW, this is NOT yet confirmed, as I have NOT seen the RBI circular to this effect yet.

NW18: FX mkt debates on RBI exotic derivatives ban news, seeks clarity NewsWire18, Thursday, Feb 7

By Prithvi Durai

MUMBAI - Leading treasurers today said they haven't received any

regulatory note or instruction from the Reserve Bank of India asking them to stop offering structured currency derivatives products.

But, taking note of a newspaper report that said RBI has asked banks to stop selling exotic derivatives, bankers said some banks could get pulled up by the central bank if such a ban has been enforced.

Business Standard newspaper today said RBI has stopped banks from

Selling exotic derivatives because companies complained to the central bank that banks instead of offering vanilla products, got into complex cross-currency derivatives.

These companies suffered huge losses because their currency bets went wrong, the report said without attributing to any named source. "We have not been given any circular from the RBI. However, everyone knows about these losses and people may be jittery about taking fresh derivative positions," said a dealer at a European bank. "There has been no impact on the (spot or forward dollar/rupee) market. But, the market is talking about it," said a dealer at a U.S. bank.

Several central bank officials NewsWire18 spoke to clarified that no circular has been issued to any bank on the matter. No official word on the newspaper report too was available. Senior treasury officials said the central bank prefers use of derivatives only for hedging currency exposures.

As per the comprehensive guidelines on derivatives issued in April last year, the RBI said "suitability and appropriateness" policies are of critical importance for banks that offer derivative products to companies.

According to RBI norms, it is imperative that banks offer derivative products in general, and structured products in particular, only to those companies who understand the nature of the risks inherent in these transactions.

RBI norms also say that products being offered by banks must be consistent with companies' internal policies as well as risk appetite. More recently, in its monetary policy review on Jan 29, the RBI advised banks to monitor their corporate clients' foreign exchange exposures.

According to RBI, the fundamental requirement for any company to undertake derivative transaction is the existence of an underlying exposure to foreign exchange risk whether on current or capital account.

Meanwhile, rupee was firm against dollar due to exporter dollar sales.

Hmmm... this is interesting. A world of Corporate Mungerilals. Add to it dangers of derivatives & power of leveraging!

Stung firms want banks to pay

 

 

It appears that hundreds of Indian companies that bought these complex

cross-currency options and structured products to seemingly protect

themselves from foreign exchange risk are now staring at significant

losses. And many of them are starting to cry foul.

 

As a result, banks that sold such products are gearing up for legal battles

with clients turned adversaries, predominantly small and medium Indian

companies, many with unsophisticated internal risk management

practices, who are questioning the very legality of such products.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On one side of this battle are some of the fastest growing and most aggressive banks in India—Yes Bank Ltd, Kotak Mahindra Bank Ltd, Axis Bank Ltd, ICICI Bank Ltd, HDFC Bank Ltd, among others—and powerful law firms, such as Amarchand and Mangaldas and Suresh A Shroff and Co., and AZB and Partners.

 

Arrayed against them are a growing list of small companies, some publicly traded, as well as the well-regarded law firm of J Sagar Associates, a crack team of investigators at auditor KPMG and independent consultants such as A.V. Rajwade, perhaps India’s leading expert when it comes to derivatives.

 

Because Indian accounting laws do not require companies to report notional losses on account of derivatives contracts, details of losses are just beginning to come in. Experts say that many companies are aware of the losses—indeed, in several cases, the chief financial officer (CFO) has been quietly axed—but will only report them in coming quarters on closing out their contracts.

 

The implications are significant for companies that have resorted to such instruments to hedge their foreign exchange exposure as well as for a country that considers itself insulated against most global financial risks.

 

The banks and their lawyers claim the derivatives—a financial term used to describe an instrument whose value is a function of an underlying commodity, bond, stock, or currency (also simply called underlying) and which is used as a risk management and mitigation tool—are legal.

 

Lawyers and consultants advising the affected firms say the products that were sold violate the country’s Foreign Exchange Management Act, which regulates all foreign currency transactions, and the Reserve Bank of India (RBI) guidelines. At the core of the battle is a debate over whether these were sold for hedging or speculation.

 

Law firms that Mint spoke to say that at least six companies have filed suits in various courts across India and add that many more such cases are on their way.

This is page 1 of the 5 page article on http://www.livemint.com/2008/03/17002646/Stung-firms-want-banks-to-pay.html - LiveMint. Read rest here.

• Literal: A person who cannot dance claims that the stage is tilted.
• English equivalent: A bad workman blames his tools.
• Bengali equivalent: Naachte na janle uthan baeka.
• Marathi equivalent: Naachataa yeInaa aangan waakade.
• Tamil equivalent: Aada teriyada tevadiya, mutram konal.

BasantJi...I hope that you know who the FOREX head at Yes Bank is.....

Could be possibly...yes!!

MUMBAI: Private sector lenders on Tuesday criticised law firms and consultants for wrongly prompting corporates not to meet their payment commitments to banks after the companies started making losses due to volatility in global markets.

Besides, the banks also wanted more finite guidelines from the Reserve Bank on structured derivative products such as interest rate swaps and currency swaps. It is believed that the exposure of Indian banks in forex (Fx) derivative products is Rs 10,000 -15,000 crore.

In derivatives, however, foreign bankers are the major players. The exposure of the public sector banks, barring State Bank of India, Bank of India and Bank of Baroda, is limited in forex derivative products.

The private sector banks, which did not want to be quoted, said many law firms acting as intermediaries between banks and SMEs are now taking advantage of the confusions in the foreign exchange and derivatives products market prompting companies not to m eet their obligations and thus to prolong the litigations.

"We have seen many lawyers (of SMEs that made losses in derivative products) prompting their clients not to meet their obligations to banks citing various reasons. It's high time for the Reserve Bank to come out with a more finite guideline on such produ cts," Head of a private sector bank said.

A host of private sector banks such as Axis Bank, ICICI Bank, HDFC Bank, Kotak Bank and Yes Bank are understood to be in legal battles with their corporate clients who question the validity and legality of the derivative products when they started incurr ing losses in derivatives market.

Corporates started making losses following the high volatility and the consecutive widening in spreads in a variety of derivative products such as interest rate swaps and currency swaps. - PTI

This is good for banks because this losses(ifany) is not their loss it is their client loss which now will come to fore and in the long run banks are not laiable unless a company goes belly up

Indeed they are corporates but they for themselves has/have not taken this position,
it is for their clients and anyways all banks are hedged against this so MTM losses are
not for banks but for the companies, banks are the facilitator(s).

I know it won`t be easy to take money (back), that is why I told in medium to long term
it is a non-issue for banks, but if for this reason that particular company files for
bankruptcy then nothing can be done.

the nse / bse is going down real hard today as a rock in water ...... where will it stop today

http://www.bloomberg.com/apps/news?pid=20601039&sid=af8MlUPq6pwk&refer=home - Indian Treasurers' Currency Bets Are Going Sour: Andy Mukherjee

To explain the issue at hand, let me borrow the definition of banking as it stands in the statute book. According to the Banking Regulation Act, 1949, banking is defined as 'accepting deposit of money from public for the purpose of lending or investment.'

In short, banking is simply taking money from one as deposit and lending to other.

But this definition was drafted during innocent times. And times have changed, perhaps drastically, so much so that 'modern banking' is beyond comprehension of even qualified finance professionals.

For an outsider it would seem that most of these modern, second-generation and private sector banks in India are behaving like casinos.

In fact, should they not carry out these titillating activities they can never add the appellation 'modern' or for that matter 'second-generation' to their brand equity. Such is the imperial demand of the modern times. Moreover, anyone who has a contrary view is instantly labelled as primordial by the beneficiaries of this system.

I hope that readers realise that like drug peddlers encouraging users of drug by providing easy and cheap drugs, some of these banks have lured corporates in India to enter into what is popularly called 'exotic derivative contracts.'

As I understand from corporate India and my fellow professionals, the bait was first to 'allow' these corporates to make easy money in the first few transactions entered by the banks with the corporates.

Corporates, emboldened by such initial success, recklessly began to take bigger bets. And when their bets went awry, they were stuck with massive losses. However, it may be interesting to note that banks may not end up with the concomitant profits. And that is the crux of the issue.

This piece essentially seeks to explain the latest threat by our baking sector to our corporates and by our corporates to our banks.

How these exotic derivative works

Let me illustrate the situation through a hypothetical contract entered into by a corporate and a bank. Let us further assume that these contracts are entered on January 1, 2007 for a year when the corporate 'notionally' agrees to sell Euro for purchasing US $5 million, that is, without any compelling need for the corporate to purchase US dollar. Nor does it have any Euros to sell. Yet the contract is entered into.

Further, we assume that the Euro was equal to $1.30 in the spot market on the day of the contract.

These contacts usually have a 'knock out' clause. That is, if the US dollar appreciates to say 1.27 against the Euro, the bank would pay the Indian corporate, say, a sum of $10,000 and the contract would come to an end.

Similarly, if the US dollar depreciated to 1.33 against the Euro, the corporate in turn would pay the bank a sum of say US $15,000. But this is with a crucial distinction -- the contract would not come to an end and it would continue even as the US dollar depreciates against the Euro.

Now to the third part of the contract -- this is the killer -- and this is called 'knock in.' Should the US dollar depreciate against the Euro to 1.40, the corporate would have to pay $5 million multiplied by 1.40 less a predetermined rate of say 1.20. (why 1.20 is again a story in itself -- but to put it briefly, it is an arbitrary figure).

Readers may note that, in the above instance, the corporate would have to pay twenty cents for every one US dollar contracted, which works out to $ 1million. And that is not all. Should the US dollar appreciate to above 1.40 and once again depreciate, the corporate would have to pay the above sum every time the dollar breaches the 1.40 mark!

And on January 1, 2008, this notional contract is reversed at the prevailing rates between US dollar and Euro. It may be noted that the above is merely illustrative of the financial engineering attempted by both parties. Needless to emphasise it does have numerous variations and attendant complexities.

Even Shylock would not have made such a skewed contract. And if one is still unable to comprehend this issue, let me remind one of the childhood board games, 'Monopoly.' Modern banking is merely an adult version of the same with two important variations -- the players need to have formal qualifications and the net impact runs into several million rupees, or dollars.

Crucially, this is merely a sample of what goes on in the arcane world of finance. It is indeed a sorry state of affairs to note that the best of minds in India are engaged in surpassing Shylock. Don't all these look farcical especially after the players have cleared tough competitive professional examinations?

Isn't all this an attempt to make money out of thin air?

Where are the regulators?

It may be noted that the Reserve Bank of India had brought out a circular stating inter alia that such contracts can be entered into by banks only if there is an underlying foreign exchange transaction. This means that only genuine exporters and importers can enter into such transactions based on their legitimate requirement of foreign exchange.

What is being increasingly witnessed is that both the corporates and banks have thrown caution to the winds as banks have not insisted on any underlying contracts. And that has provided a window of opportunity to corporates.

What is interesting to note here is that the outstanding value of all these contracts reported to the RBI by all banks aggregates to approximately $3 trillion as at December 2007. Such a huge amount is inexplicable simply because the total foreign exchange hedging requirement (aggregate of both imports and exports) of the country cannot exceed $500 billion in a year.

And even assuming that all of these are hedged and outstanding on that date (which is unlikely), the figure of approximately $3 trillion suggests that a substantial number of such contracts have been entered into between banks and corporates without any underlying requirement, perhaps merely as a wager.

Since RBI is in the know of these figures, one is not certain whether some of the banks have effectively hoodwinked the RBI or have they taken advantage of some loophole.

Another dimension that requires RBI's immediate attention is that many banks have converted their treasury departments into profit centres and fixed profit targets for the same. This is similar to fixing profit targets for cashiers. And when that happens, it is natural for cashiers to pay you Rs 900 for every Rs 1,000 withdrawn.

No wonder, when such targets were fixed, treasury managers went on an overdrive selling such products to corporates. And this is a serious ethical and corporate governance issue and, to me, remains at the root of the problem.

What has added fuel to the fire is that the US dollar has been consistently weakening against all major currencies across the world in 2007. And banks with foreign exchange experts on their panels have invariably ensured that corporates 'notionally' end up purchasing the US dollar and banks end up purchasing other global currencies.

When the US dollar depreciated against other currencies, corporates found themselves holding the wrong end of the stick. How could banks provide such advice to clients when they were in the know of an impending depreciation of the US dollar?

Naturally, corporates are visited by huge losses. As and when losses are actually booked, in some cases it could wipe out the net worth of corporates several times over. And that is why the banks are worried -- they may not be the beneficiaries of such transactions.

Corporates no less guilty

As events unfold, corporates, especially public companies, (some with independent directors on their boards) are no less guilty. Managements claim that they were completely unaware of these transactions entered into by their own employees. In an astonishing case of self indictment, the management of a public company has even gone on record in an affidavit before a court stating that it was not at all aware of these contracts.

And when pointed out to the fact that they enjoyed the profits from such transactions for the year ending March 31, 2007 (which was taken into account and also audited when the affidavit was filed before the courts), they have claimed complete ignorance -- yes, ignorance coupled with injured innocence -- on the matter.

As the stench from this imbroglio overwhelms us, it is increasingly clear that RBI, the Securities Exchange Board of India, and the Registrar of Companies have lots to answer for.

Playing with other people's money

It does not matter who should be the beneficiary of such transactions: banks or corporates. Either way, it is the common man who is the loser. In case of banks, we lose (as depositors and shareholders). If corporates lose, we (as shareholders) lose.

It is time to realise that both corporates and banks are playing with other people's money. And RBI has to intervene in the matter decisively and at once. It needs to set up a high power committee comprising eminent bankers, lawyers, media personnel, finance and foreign exchange experts to set right the matter.

Allowing the issue to fester any longer would irreparably harm the Indian economy. In any emerging economy, banks cannot turn into casinos or corporates into gamblers.

PS: It is indeed inexplicable that many such contracts have been reported from the southern part of the country, where corporates are supposedly conservative.

source: rediff