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Unit study guide · NISM Series I

Regulatory Framework for Exchange Traded Currency Derivatives

12 questions in this unit

What this unit covers

Key ideas

From the practice bank · 1

Which Indian law provides the foreign-exchange management framework under which RBI regulates permitted foreign-exchange transactions and related currency-derivative participation?

FEMA, the Foreign Exchange Management Act, 1999, is the law behind RBI's foreign-exchange rules. RBI's rules and directions for currency derivatives are made under it. Securities rules may also apply to an exchange-traded contract, but they do not replace FEMA. Remember: Match the legal question to the specific regulatory function instead of choosing any financial-market law.

Hint Common mistake: Assuming that exchange trading makes SEBI-related securities law the only applicable legal framework.

I-034

From the practice bank · 2

Which function was included in the published mandate of the RBI-SEBI Standing Technical Committee on exchange-traded currency and interest-rate derivatives?

The committee's published mandate includes coordinating RBI and SEBI and reviewing product design, margins, risk controls and surveillance. It sets the framework. It does not deal for clients, assess tax or move money. Remember: Distinguish regulatory coordination from trade execution and settlement operations.

Hint Common mistake: Confusing a framework-setting committee with the exchange, clearing corporation or tax authority.

I-035

From the practice bank · 3

A resident user holds INR-pair positions of USD 60 million equivalent on Exchange X and USD 30 million equivalent on Exchange Y. The user proposes another USD 15 million equivalent on X in a different INR pair. How does RBI’s USD 100 million threshold for not establishing exposure upfront apply?

Add the positions across both exchanges and all INR pairs: USD 60 million + USD 30 million + USD 15 million = USD 105 million. That is above the USD 100 million threshold, so the user must follow the process for positions above it. Even below the threshold, the user needs a real contracted exposure that is not hedged elsewhere. Exchange position limits still apply. Remember: Keep three checks separate: valid contracted exposure, the combined documentation threshold and exchange position limits.

Hint Common mistake: Treating the USD 100 million provision as a separate allowance per pair or exchange, or as a waiver of underlying exposure.

I-036

From the practice bank · 4

A resident importer’s USD payable is already fully hedged by an outstanding forward. It has no other unhedged exposure and proposes an additional INR-pair futures hedge against the same payable while retaining the forward. Which statement follows from the RBI contracted-exposure requirement?

The payable is already fully hedged by the forward, so it cannot support a second hedge. RBI's directions for INR exchange-traded contracts need a contracted exposure that is not already hedged with another derivative. This holds even when documents are not asked for upfront. Remember: Check both that the contracted exposure exists and that it is not already fully hedged elsewhere.

Hint Common mistake: Treating an invoice as reusable support for multiple full hedges or confusing documentation relief with exposure relief.

I-070

From the practice bank · 5

An institution holds professional clearing membership, but no trading membership, in the currency-derivatives segment. Which activity follows from that status alone?

A professional clearing member clears and settles the eligible trades of trading members. NSE Clearing's rules treat it as different from a trading member. On its own, this status gives no right to trade for clients or for itself, and no power to grant trading membership. Remember: Match the permitted function to the actual membership category rather than to the institution’s size or reputation.

Hint Common mistake: Assuming an institution that can clear trades automatically has authority to execute them as a trading member.

I-071

From the practice bank · 6

A recognised stock exchange proposes to start foreign-exchange derivative business but does not hold the relevant RBI authorisation. Under RBI’s directions, is its stock-exchange recognition alone sufficient?

Recognition as a stock exchange is not enough. RBI's directions also require authorisation under section 10(1) of FEMA before an exchange or clearing corporation starts foreign-exchange derivative business. Settling only in INR or serving only residents does not change this. Remember: Do not treat permission under one regulatory framework as automatic permission under another.

Hint Common mistake: Assuming that INR cash settlement takes currency-derivative business outside the stated FEMA authorisation requirement.

I-094

From the practice bank · 7

An Authorised Dealer trades permitted exchange-traded currency derivatives on its own account. Under RBI’s directions, which limit framework must it observe?

An Authorised Dealer trading on its own account must stay within its Net Open Position Limit (NOPL) and also within the exchange's limits. RBI's directions apply both. Meeting one limit does not excuse breaking the other. Remember: Check all applicable participant and venue limits rather than selecting only one.

Hint Common mistake: Assuming that proprietary trading status overrides either the NOPL or exchange-level risk limits.

I-095

From the practice bank · 8

Which SEBI regulatory instrument specifically concerns stock exchanges and clearing corporations, rather than the separate regulation of stock brokers or KYC registration agencies?

The SECC Regulations, 2018 are the rules for stock exchanges and clearing corporations. Their full title names both of them. Remember: Match the category of regulated institution to the corresponding instrument before looking for a detailed rule.

Hint Common mistake: Using a broker or KYC-agency regulation as though it were the exchange and clearing-corporation framework.

I-119

From the practice bank · 9

A user’s INR-currency derivative hedge portfolio is USD 150 million equivalent under designated Authorised Dealer monitoring. A genuine partial cancellation reduces its contracted exposure to USD 110 million. No other unhedged exposure is available, and the dealer regards the change as material. Assuming other limits are met, what adjustment is required?

This answer removes the mismatch while preserving the hedge for the remaining contracted exposure. The remaining contracted exposure is USD 110 million against a USD 150 million hedge, leaving USD 40 million excess. The supplied facts exclude reassignment to another unhedged exposure and an immaterial-change exception. The reduction is a real cancellation, not merely a market-value fluctuation. The appropriate adjustment is to reduce the excess USD 40 million. The remaining USD 110 million of exposure is not stated to have disappeared. Remember: When exposure is genuinely reduced, check the remaining notional, reassignment possibility and applicable exceptions.

Hint Common mistake: Treating every originally valid hedge as exempt from later exposure monitoring.

I-120

From the practice bank · 10

A firm has approved a budget for a possible USD import next year, but has not entered into the import transaction and has no other FX exposure. Does the budget alone establish contracted exposure for an INR-involving exchange-traded currency derivative under RBI’s purpose rule?

A budget for a possible import is only a plan. The import has not been entered into, so there is no contracted exposure yet. A planned transaction can create anticipated exposure, but RBI's purpose rule for these INR contracts is about contracted exposure. Remember: Identify whether the underlying transaction has been entered into before applying the contracted-exposure requirement.

Hint Common mistake: Treating a budget or forecast as an entered transaction, or going to the opposite extreme and requiring payment completion.

I-142

From the practice bank · 11

For an otherwise eligible user of an exchange-traded EUR-USD derivative, which statement reflects RBI’s specific purpose provision for contracts not involving INR?

For a contract with no rupee leg, such as EUR-USD, RBI's rule does not limit the purpose of the trade. All the other rules still apply, such as who may trade, position limits and margins. Remember: Read the currency scope of a purpose rule, and do not extend one clause into a blanket exemption.

Hint Common mistake: Applying the INR-specific purpose condition to every pair, or assuming no purpose restriction means no regulation.

I-143

From the practice bank · 12

A recognised stock exchange plans to undertake foreign-exchange-derivative business. Under RBI’s exchange-derivative directions, which authorisation is additionally required for that business?

The exchange needs RBI authorisation under section 10(1) of FEMA. RBI's directions say a recognised stock exchange or clearing corporation cannot start foreign-exchange derivative business without it. Being a recognised exchange is not enough on its own. Remember: Distinguish recognition of the market institution from the foreign-exchange authorisation needed for its currency business.

Hint Common mistake: Assuming a recognised exchange is automatically authorised for every financial product.

I-144
Margin

Margin is the money a participant must keep in place to carry a leveraged position.

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