How Can A Citizen Undertake Forex Transaction? What Are The Permitted Forex Derivative Products?

In India, resident persons are permitted to undertake forex transactions only with authorized persons and for permitted purposes, in terms of the Foreign Exchange Management Act, 1999 (FEMA). RBI informs that an authorized person is an entity authorized by the Reserve Bank of India to deal in forex. It can be an authorized dealer, money changer, off-shore banking unit, or any other person for the time being authorized under Sub-Section (1) of Section 10 of FEMA.

Forex transactions on electronic trading portals (ETPs)

Permitted forex transactions executed electronically should be undertaken on electronic trading platforms (ETPs), those will be authorized for the purpose by the Reserve Bank of India (RBI), or on recognized stock exchanges (NSE, BSE, MSE). An Electronic Trading Platform (ETP) is any electronic system, other than a recognized stock exchange, on which transactions in eligible instruments like securities, money market instruments, foreign exchange instruments, derivatives, etc. are contracted. No entity should operate an ETP without obtaining prior authorization from RBI under The Electronic Trading Platforms (Reserve Bank) Directions, 2018.

Permitted forex derivative products

There are two types of forex derivative products namely OTC derivatives, and Exchange-traded derivatives. Forex derivatives traded on exchanges are referred to as exchange-traded forex derivatives. All other forex derivatives, including those traded on ETPs, are called OTC forex derivatives.

Under OTC derivatives, for retail users, there will be derivative options like Foreign Exchange Forward, Foreign Exchange Swap, Currency Swap, Purchase of Call and Put Options, and Purchase of Call and Put Spreads. On the other hand, for non-retail users, any foreign exchange derivative contract, including covered options, which the Authorised Dealer can price and value independently and is approved by the board of the Authorised Dealer, provided that the potential loss from the derivative transaction to the user, in any scenario, does not exceed the loss that the user would face if he had left the position unhedged, the RBI informs.

Under Exchange traded derivatives, there will be two options, namely Foreign Exchange Future, and Foreign Exchange Option.