RBI okays new rules for structured derivative offers by banks

The Reserve Bank of India on Wednesday said banks may offer structured derivative products to customers for hedging risk. These should not contain any underlying derivative.

Banks must seek a resolution of the customer-company board on the limit set for dealing in derivatives. (Earlier, companies had to specifylimits for particular persons allowed to enter into derivative deals). This takes effect from January 1, 2012.

While monitoring this limit, a bank would take into account the absolute notional amount of all derivative contracts entered into by the company.

The use of a structured derivative is in addition to generic derivative products like foreign exchange forward contracts and interest rate swaps which a bank can offer for risk management. RBI’s revised norms said banks will need its approval prior to offering structured derivative products.

Structured derivative products include instruments that are a combination of either cash and one or more generic derivative products. They could also be a combination of two or more generic derivatives.

Source: Business Standard