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International Financial Services Centres Authority E-file no: IFSCA-FMPP0BR/14/2024-Banking June 27, 2024 To, All IFSC Banking Units Dear Sir/Madam, Permission to offer OTC derivatives on Gold and Silver: Amendment to OTDE Module (Module no. 13) of IFSCA Banking Handbook COB Directions v6.0 1. It has been decided to permit IFSC Banking Units (IBUs) to undertake OTC derivatives on Gold and Silver and offer such derivatives to their clients. 2. The updated OTC derivatives (OTDE) Module of the IFSCA Banking Handbook, with the necessary changes marked in bold, is enclosed. The updated module shall be included in the IFSCA Banking Handbook subsequently. 3. The content of the circular shall come in to force with immediate effect. Yours faithfully (Supriyo Bhattacharjee) Chief General Manager Department of Banking MODULE NO. 13 OTC DERIVATIVES (OTDE) 1. Application i. These directions are the IFSCA OTC Derivatives Directions (or OTDE). ii. These directions set out the requirements for undertaking OTC derivatives (OTC) in IFSC and clearing and reporting of such derivatives. iii. The term “derivative” used in the rest of this document shall mean OTC derivatives in foreign exchange, interest rate, credit, Offshore Derivative Instruments (ODIs)1, Gold and Silver specified in Annex 2 and shall include such derivatives denominated in INR but settled in FCY. iv. ODIs and OTC derivatives on Gold and Silver are ‘Qualified Financial Contracts’ under Bilateral Netting of Qualified Financial Contracts Act, 2020. 2. Definitions i. “Booked in IFSC” means the entry of the derivatives contract on the books of a person –: (a) who is a party to the uncleared derivatives contract; and (b) whose place of business for which the book relates to is in IFSC ii. ‘Initial margin’ means the collateral collected by a counterparty to cover its current and potential future exposure in the interval between the last collection of margin and the liquidation of positions or hedging of market risk following a default of the other counterparty iii. “Professional client” means a client who possesses the experience, knowledge, and expertise to make his own decisions about undertaking a derivative and properly assess the risk of such derivative and includes a client classified as a “deemed professional client”. iv. “Deemed professional client” means the clients listed in Annex 1 v. “Retail client” means a client that is not a professional client. vi. “Counterparties” means clients who would otherwise be classified as “professional clients” but who are dealing with the market makers on a principal-to-principal basis. 1 As defined in the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations,2019 dated September 23,2019 (as amended). vii. “Recognised credit rating agency” shall mean the following rating agencies and include their subsidiary rating agencies in various jurisdictions: a. Moody’s b. Fitch c. S & P Global ratings viii. ‘Variation margin’ means the collateral collected by a counterparty to reflect the results of the daily marking-to-market or marking-to-model of outstanding contracts. ix. “Market maker” means a financial institution (as defined in section 3(1)(c) of the IFSCA Act,2019) that undertakes derivatives on its own account and at his own risk and at prices quoted by him and who is so designated by the Authority. x. “Netting set’ means a set of non-centrally cleared derivative contracts between two counterparties that is subject to a legally enforceable bilateral netting agreement. xi. “IFSC covered entity” means an entity engaged in financial business, a significant non-financial entity and any other entity designated by the Authority as an IFSC Covered entity but excludes the entities listed in Annex 3. xii. “Entity engaged in financial business” means an entity that is engaged in the business of finance if the entity itself or the group to which it belongs has an aggregate month-end average notional amount (AANA) of non-centrally cleared derivatives outstanding for March, April, and May of 2021 exceeds €50 billion. xiii. “Significant non-financial entity” means any entity other than an entity engaged in financial business if the entity itself or the group to which it belongs has an average aggregate notional amount of non-centrally cleared derivatives outstanding for March, April, and May of 2021 exceeding $ €75 billion. xiv. “Group “means a holding company, subsidiary, associate company (including a joint venture company) and a subsidiary of a holding company to which the entity is also a subsidiary. xv. “Foreign Covered Entity” means a person operating outside IFSC who, is required, under the regulations laid down by its home regulator, to exchange margin for uncleared derivative contracts. xvi. “Uncleared derivatives contract” means a derivative contract that is not, or is not intended to be, cleared or settled by a person operating a clearing facility through which parties to a contract substitute, through novation or otherwise, the credit of the person operating the clearing facility for the credit of the parties; xvii. “Specified derivatives contract” means any derivatives contract that meets all of the following criteria: (a) the derivatives contract is not an exchange traded derivatives contract; (b) the parties to the derivatives contract are not related corporations; (c) the derivatives contract is booked in IFSC by both parties to the derivatives contract; (d) the parties to the derivatives contract are persons who are not exempt from providing margin for uncleared derivatives contracts. (e) the derivatives contract as specified by the Authority in Annex 7. xviii. “Specified person” means a. An IBU acting as a market maker to a specified derivatives contract booked in IFSC. b. Any other “financial institution” as defined u/s 3(1)(c) of the IFSCA Act,2019. c. Any person resident in India or a person resident outside India who enters into a specified derivatives contract booked in IFSC with a market maker. 3. Participants i. For an OTC derivative contract booked in IFSC to be valid, at least one of the parties to the contract must be a “market maker”. ii. IBUs shall be market makers in OTC derivatives (except ODIs) booked in IFSC. iii. IBUs holding a Foreign Portfolio Investor (FPI) certificate under the provisions of the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations,2019 dated September 23,2019 (as amended) shall be market makers for ODIs. iv. The following persons shall be treated as “clients” with respect to derivatives booked in IFSC: a. Financial institutions (other than BUs) as defined u/s section 3(1)(c) of the IFSCA Act, 2019 b. Persons resident in India as defined u/s 2(v) of FEMA,1999, if specifically permitted (see 5 (iii) below) c. Persons resident outside India as defined u/s 2(w) of FEMA,1999. 4. Obligation to classify clients i. Client classification requirements specified in the Client Classification module (CLIC) of COB shall not be applicable to this module. ii. Market makers shall classify their clients into the following categories: a. Professional clients b. Counterparties c. Retail clients iii. Market makers shall undertake the classification in para 4(ii) at the start of the relationship and review the same at regular intervals not less than annually. If so warranted, in the opinion of the BU, reclassification on the basis of information received may be undertaken by IBUs between scheduled intervals. iv. Clients shall be informed about their classification before offering derivative contracts to them.
