The IFSCA Banking Handbook COB Direction- Version 2

The IFSCA Banking Handbook: Conduct Of Business Directions- V 2.0 1 The IFSCA Banking Handbook Conduct of Business Directions- V 2.0 (COB) The IFSCA Banking Handbook: Conduct Of Business Directions – V 2.0 1 Contents PURPOSE ………………………………………………………………………………… . 7 MODULE NO. 1 Activities of Banking units (ACBU) 8-16 1. Application ……………………………………………………………………………………….9 2. Definitions ………………………………………………………………………………………..9 3. Governing law for activities – Guidance ………………………………………………………9 4. Permitted activities ……………………………………………………………………………..10 5. Activities that IBUs shall not perform …………………………………………………………17 6. Compliance with Anti-Money Laundering (AML) Standards and Counter-Terrorist Financing (CFT) guidelines ………………………………………….17 MODULE NO. 2 Undertaking Bussiness in Foreign Currency (BIFC) 18-20 1. Application ………………………………………………………………………………………19 2. Permissible Business in Foreign Currency…………………………………………………..19 3. Compliance with provisions under the Foreign Exchange Management Act,1999……..20 4. Maintenance and use of Nostro accounts……………………………………………………20 MODULE NO. 3 Client Classification (CLIC) 21-29 1. Application ……………………………………………………………………………………….22 2. Client Classification ……………………………………………………………………………..22 3. Classification as a Retail Client ………………………………………………………………..22 4. Classification as a Professional Client ………………………………………………………..23 5. Reclassification of a Professional Client as a Retail Client …………………………………27 6. Market Counterparties …………………………………………………………………………..27 7. Trusts and Funds ………………………………………………………………………………..28 The IFSCA Banking Handbook: Conduct Of Business Directions- V 2.0 2 8. Agent as Client …………………………………………………………………………………..28 9. Record keeping ………………………………………………………………………………….29 MODULE NO. 4 Communications with clients and financial promotions 30-37 (COMFP) 1. Application ………………………………………………………………………………………..31 2. Requirements – Communications ……………………………………………………………..31 3. Requirements – Financial promotions …………………………………………………………31 4. Content of a Financial Promotion ………………………………………………………………33 5. Unsolicited Real Time Financial Promotions ………………………………………………….34 6. Record keeping …………………………………………………………………………………..36 MODULE NO. 5 Use of Electronic Trading platforms and the services of 38-40 Voice Brokers (TVBP) 1. Application …………………………………………………………………………………………39 2. Definitions ………………………………………………………………………………………….39 3. Directions …………………………………………………………………………………………..39 MODULE NO. 6 Key Information and Client Agreement (KICA) 41-44 1. Application …………………………………………………………………………………………42 2. Client agreement ………………………………………………………………………………….42 3. Record keeping ……………………………………………………………………………………43 4. Annex 1 Key Information (see para 2(ii)) ……………………………………………………….44 MODULE NO. 7 Order execution and order handling (OEOH) 45-50 1. Application …………………………………………………………………………………………46 2. Best execution obligation ………………………………………………………………………..46 The IFSCA Banking Handbook: Conduct Of Business Directions- V 2.0 3 3. Client order handling ……………………………………………………………………………..46 4 Transactions at Off-market rates…..……………………………………………………………..48. 5. Records of orders and transactions……………………………………………………………..49 6. Voice and electronic communications ………………………………………………………….49 7. Direct electronic access ………………………………………………………………………….49 MODULE NO. 8 Conflicts of Interest (COIN) 51-54 1. Application ………………………………………………………………………………………..52 2. Definitions …………………………………………………………………………………………52 3. Identifying a conflict of interest…………………………………………………………………..52 4. Managing a conflict of interest………………………………………………………………….. .53 5. Inducements……………………………………………………………………………………….53 6. Introductions……………………………………………………………………………………….53 7. Requirement to disclose inducements………………………………………………………….53 8. Disclosure in summary form…………………………………………………………………………53 9. Record keeping………………………………………………………………………………….53 10. Personal Transactions…………………………………………………………………………53 MODULE NO. 9 Trust Service Providers (TRUST) 55-57 1. Application ………………………………………………………………………………………..56 2. Basic requirements ……………………………………………………………………………...56 3. Records …………………………………………………………………………………………..56 4. Due diligence …………………………………………………………………………………….56 5. Knowledge regarding source of funds ………………………………………………………...56 6. Fitness and Propriety of Persons acting as trustees…………………………………………57 The IFSCA Banking Handbook: Conduct Of Business Directions- V 2.0 4 MODULE NO. 10 Complaints handling and Dispute Resolution (CHDR) 58-61 1. Application…………………………………………………………………………………………..59 2. Arrangements for handling and redressal of complaints ………………………………………59 3. Referrals …………………………………………………………………………………………….60 4. Record keeping …………………………………………………………………………………….60 MODULE NO. 11 Accepting deposits (ACDE) 62-68 1. Application …………………………………………………………………………………………..63 2. Definitions ……………………………………………………………………………………………63 3. Permissible deposits ……………………………………………………………………………….64 4. Interest rate framework and other requirements…………………………………………………64 5. Structured deposits …………………………………………………………………………………65 6. Certificate of Deposits ………………………………………………………………………………66 7. Maintenance of Retail deposits reserve ratio (RDRR) ………………………………………….67 MODULE NO. 12 Representative Office (REPO) 69-74 1. General provisions ……………………………………………………………………………….70 2. Opening a RO………………………………………………………………………………………70 3. Conditions for opening a RO …………………………………………………………………......70 4. Procedure for application and grant/rejection of letter of permission…………………………70 5. Penalties …………………………………………………………………………………………….71 6. Activities of ROs…………………………………………………………………………………….71 7. Conduct ……………………………………………………………………………………………..73 8. Administration ………………………………………………………………………………………73 9. Adherence to Anti Money Laundering (AML) and Combating financing of terrorism (CFT) guidelines……………………………………………………………………………………….......74 10. Application of other directions ……………………………………………………………………74 The IFSCA Banking Handbook: Conduct Of Business Directions- V 2.0 5 MODULE NO. 13 OTC Derivatives (OTDC) 75-100 1. Application ………………………………………………………………………………………….76 2. Definitions …………………………………………………………………………………………..76 3. Participants …………………………………………………………………………………….......78 4. Obligation to classify clients ………………………………………………………………………78 5. Products ………………………………………………………………………………………........79 6. Suitability obligation of market makers ………………………………………………………….80 7. Mandatory clearing of derivatives contracts …………………………………………………....81 8. Margin placement for non-centrally cleared derivatives……………………………………….81 9. Exchange of Margin ………………………………………………………………………...........82 10. Margin calculation and methodologies – Initial margin…………………………………..........83 11. Margin calculation and methodologies – Variation margin………………………………........86 12. Eligible Collateral and Haircuts……………………………………………………………..........86 13. Managing collateral risks………………………………………………………………………….88 14. Substitution and rehypothecation of collateral …………………………………………………88 15. Substituted compliance …………………………………………………………………………..89 16. Implementation schedule …………………………………………………………………..........90 17. Maintenance of records …………………………………………………………………………..91 18. Reporting …………………………………………………………………………………………..91 Annex 1 – Deemed Professional Clients……………………………………………………………93 Annex 2 - OTC Derivatives contracts (See para 1(iii) of the Directions)………………………...94 Annex 3- Person specified under section 8 (ii) (a)………………………………………………....96 Annex 4 - Calculation of Initial Margin……………………………………………………………….97 Annex 5 - Standardised haircuts table for collateral ………………………………………………98 Annex 6- List of foreign jurisdictions whose margin requirements are deemed to The IFSCA Banking Handbook: Conduct Of Business Directions- V 2.0 6 be in compliance with that of IFSCA (see para 15 – Substituted compliance) …………………99 Annex 7 - List of specified derivatives contracts and recognised clearing house ……………..100 MODULE NO. 14 FX Prime Prokerage (FXPB) 101-104 1. Application ………………………………………………………………………………………… 102 2. Definitions …………………………………………………………………………………………. 102 3. Directions – IBUs providing FXPB service ………………………………………………………102 4. Directions – IBUs acting as Executing Dealer ………………………………………………….102 Annex …………………………………………………………………………………………………….104 MODULE NO. 15 Referral Services (REFRS) 105-107 1. Application ………………………………………………………………………………………….106 2. Definitions ………………………………………………………………………………………….106 3. Directions …………………………………………………………………………………………..107 4. Maintenance of records …………………………………………………………………………..107 MODULE NO. 16 Providing credit (PRCR) 108-112 1. Application …………………………………………………………………………………………109 2. Definitions………………………………………………………………………………………….109 3. General conditions on providing credit …………………………………………………………109 4. Statutory Restrictions on activity of providing credit…………………………………………...109 The IFSCA Banking Handbook: Conduct Of Business Directions- V 2.0 7 Purpose: The COB directions are aimed at ensuring that IFSC Banking Units (IBUs) meet the minimum standards of conduct expected, particularly with regard to the treatment of their clients, their dealings with counterparties and other market participants. It also includes directions to ensure that the behaviour of IBUs contributes to fostering and maintaining the integrity of financial markets in the IFSC and will assist the International Financial Services Centres Authority (IFSCA -referred as the ‘Authority’) to meet the regulatory objectives, including and particularly those related to: (a) protecting the interests of investors and users of financial services; and (b) ensuring that the financial markets under IFSCA’s purview are fair, efficient, transparent and orderly; and (c) fostering and maintaining confidence in the IFSC's financial system and regulatory regime. The IFSCA Banking Handbook: Conduct Of Business Directions- V 2.0 8 MODULE NO.1 ACTIVITIES OF BANKING UNITS (ACBU) The IFSCA Banking Handbook: Conduct Of Business Directions- V 2.0 9 1. Application i. These directions specify the activities that the Banking Units (BUs) may undertake and activities that the IBUs are barred from undertaking. 2. Definitions i. “Banking Unit (BU)” shall have the same meaning as defined in section 2(1)(c) of the International Financial Services Centres Authority (Banking) Regulations, 2020 and referred to as or “IFSC Banking Unit (IBU)” in this Handbook. ii. “Banking Company” means the Banking company of which the IBU is a branch. iii. “Clients” means a Retail Client, Professional Client or Market Counterparty as defined in Client Classification (CLIC) Module of COB iv. All other expressions unless defined herein shall have the same meaning as have been assigned to them under the Banking Regulation Act, 1949, the Reserve Bank of India Act, 1934 and the International Financial Services Centres Authority (Banking) Regulations, 2020 and any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be.