The IFSCA Banking Handbook- Conduct of Business Directions

The IFSCA Banking Handbook: Conduct Of Business Directions 1 The IFSCA Banking Handbook Conduct of Business Directions (COB) The IFSCA Banking Handbook: Conduct Of Business Directions 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 …………………………………………………………16 6. Compliance with Anti-Money Laundering (AML) Standards and Counter-Terrorist Financing (CFT) guidelines ………………………………………….16 MODULE NO. 2 Client Classification (CLIC) 17-25 1. Application ……………………………………………………………………………………….18 2. Client Classification ……………………………………………………………………………..18 3. Classification as a Retail Client ………………………………………………………………..18 4. Classification as a Professional Client ………………………………………………………..19 5. Reclassification of a Professional Client as a Retail Client …………………………………23 6. Market Counterparties ………………………………………………………………………….23 7. Trusts and Funds ………………………………………………………………………………..24 8. Agent as Client …………………………………………………………………………………..24 9. Record keeping ………………………………………………………………………………….25 MODULE NO. 3 Communications with clients and financial promotions 26-33 (COMFP) 1. Application ………………………………………………………………………………………..27 2. Requirements – Communications ……………………………………………………………..27 The IFSCA Banking Handbook: Conduct Of Business Directions 2 3. Requirements – Financial promotions …………………………………………………………27 4. Content of a Financial Promotion ………………………………………………………………29 5. Unsolicited Real Time Financial Promotions ………………………………………………….30 6. Record keeping …………………………………………………………………………………..32 MODULE NO. 4 Use of Electronic Trading platforms and the services of 34-36 Voice Brokers (TVBP) 1. Application …………………………………………………………………………………………35 2. Definitions ………………………………………………………………………………………….35 3. Directions …………………………………………………………………………………………..35 MODULE NO. 5 Key Information and Client Agreement (KICA) 37-40 1. Application …………………………………………………………………………………………38 2. Client agreement ………………………………………………………………………………….38 3. Record keeping ……………………………………………………………………………………39 4. Annex 1 Key Information (see para 2(ii)) ……………………………………………………….40 MODULE NO. 6 Order execution and order handling (OEOH) 41-45 1. Application …………………………………………………………………………………………42 2. Best execution obligation ………………………………………………………………………..42 3. Client order handling ……………………………………………………………………………..42 4. Records of orders and transactions……………………………………………………………..44 5. Voice and electronic communications ………………………………………………………….44 6. Direct electronic access ………………………………………………………………………….45 MODULE NO. 7 Conflicts of Interest (COIN) 46-49 The IFSCA Banking Handbook: Conduct Of Business Directions 3 1. Application ……………………………………………………………………………………….47 2. Definitions ………………………………………………………………………………………..47 3. Identifying a conflict of interest………………………………………………………………….47 4. Managing a conflict of interest………………………………………………………………….. 48 5. Inducements………………………………………………………………………………………48 6. Introductions………………………………………………………………………………………48 7. Requirement to disclose inducements…………………………………………………………48 8. Disclosure in summary form………………………………………………………………………..48 9. Record keeping…………………………………………………………………………………48 10. Personal Transactions………………………………………………………………………..48 MODULE NO. 8 Trust Service Providers (TRUST) 50-52 1. Application ………………………………………………………………………………………..51 2. Basic requirements ……………………………………………………………………………...51 3. Records …………………………………………………………………………………………..51 4. Due diligence …………………………………………………………………………………….51 5. Knowledge regarding source of funds ………………………………………………………...51 6. Fitness and Propriety of Persons acting as trustees…………………………………………52 MODULE NO. 9 Complaints handling and Dispute Resolution (CHDR) 53-56 1. Application…………………………………………………………………………………………..54 2. Arrangements for handling and redressal of complaints ………………………………………54 3. Referrals …………………………………………………………………………………………….55 4. Record keeping …………………………………………………………………………………….55 MODULE NO. 10 Accepting deposits (ACDE) 57-62 1. Application …………………………………………………………………………………………..58 The IFSCA Banking Handbook: Conduct Of Business Directions 4 2. Definitions …………………………………………………………………………………………..58 3. Permissible deposits ………………………………………………………………………………59 4. Interest rate framework and other requirements………………………………………………..59 5. Structured deposits ………………………………………………………………………………..60 6. Certificate of Deposits ……………………………………………………………………………..61 7. Maintenance of Retail deposits reserve ratio (RDRR) …………………………………………62 MODULE NO. 11 Representative Office (REPF) 63-68 1. General provisions ……………………………………………………………………………….64 2. Opening a RO………………………………………………………………………………………64 3. Conditions for opening a RO …………………………………………………………………......64 4. Procedure for application and grant/rejection of letter of permission…………………………64 5. Penalties …………………………………………………………………………………………….65 6. Activities of ROs…………………………………………………………………………………….65 7. Conduct ……………………………………………………………………………………………..67 8. Administration ………………………………………………………………………………………67 9. Adherence to Anti Money Laundering (AML) and Combating financing of terrorism (CFT) guidelines……………………………………………………………………………………….......68 10. Application of other directions ……………………………………………………………………68 MODULE NO. 12 OTC Derivatives (OTDC) 69-94 1. Application ………………………………………………………………………………………….70 2. Definitions …………………………………………………………………………………………..70 3. Participants …………………………………………………………………………………….......72 4. Obligation to classify clients ………………………………………………………………………72 5. Products ………………………………………………………………………………………........73 6. Suitability obligation of market makers ………………………………………………………….73 The IFSCA Banking Handbook: Conduct Of Business Directions 5 7. Mandatory clearing of derivatives contracts …………………………………………………...74 8. Margin placement for non-centrally cleared derivatives……………………………………….75 9. Exchange of Margin ………………………………………………………………………...........76 10. Margin calculation and methodologies – Initial margin…………………………………..........77 11. Margin calculation and methodologies – Variation margin………………………………........80 12. Eligible Collateral and Haircuts……………………………………………………………..........80 13. Managing collateral risks………………………………………………………………………….82 14. Substitution and rehypothecation of collateral …………………………………………………82 15. Substituted compliance …………………………………………………………………………..83 16. Implementation schedule …………………………………………………………………..........84 17. Maintenance of records …………………………………………………………………………..85 18. Reporting …………………………………………………………………………………………..85 Annex 1 – Deemed Professional Clients……………………………………………………………87 Annex 2 - OTC Derivatives contracts (See para 1(iii) of the Directions)………………………...88 Annex 3- Person specified under section 8 (ii) (a)………………………………………………....90 Annex 4 - Calculation of Initial Margin……………………………………………………………….91 Annex 5 - Standardised haircuts table for collateral ………………………………………………92 Annex 6- List of foreign jurisdictions whose margin requirements are deemed to be in compliance with that of IFSCA (see para 15 – Substituted compliance) …………………93 Annex 7 - List of specified derivatives contracts and recognised clearing house ……………..94 MODULE NO. 13 Referral Services (REFRS) 95-97 1. Application …………………………………………………………………………………………96 2. Definitions ………………………………………………………………………………………….96 3. Directions …………………………………………………………………………………………..96 The IFSCA Banking Handbook: Conduct Of Business Directions 6 4. Maintenance of records …………………………………………………………………………97 MODULE NO. 14 Providing credit (PRCR) 98-102 1. Application …………………………………………………………………………………………99 2. Definitions…………………………………………………………………………………………..99 3. General conditions on providing credit ………………………………………………………….99 4. Statutory Restrictions on activity of providing credit……………………………………………99 The IFSCA Banking Handbook: Conduct Of Business Directions 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 8 MODULE NO.1 ACTIVITIES OF BANKING UNITS (ACBU) The IFSCA Banking Handbook: Conduct Of Business Directions 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” will have the same meaning as given in the “Glossary” module. 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. 3. Governing law for activities – Guidance i. International financial transactions are often conducted on the basis of bilateral agreements between the parties. Such agreements may either be in the form of standard documents like International Swaps and Derivatives Association (ISDA for OTC derivatives), Global Master Repurchase Agreement (GMRA for repo transactions) or, in cases where standard documentation do not exist or as per the decision of the parties, in the form of bespoke agreements laying down the terms and conditions by which the proposed transaction is to be governed. ii. One of the important choices that the parties that enter into an international financial transaction on the basis of bilateral contract have to make is about the choice of governing law i.e., the law of the jurisdiction that will govern their legal relationship. In many cases, the jurisdiction chosen may be different from the jurisdiction in which either of the parties to the transaction is domiciled. Wide acceptance of the jurisdiction and its law to settle international commercial transactions, experience of judges in handling international transactions, availability of high-quality law firms, are some of the factors that determine the choice of governing law.