NATIONAL COMMODITY & DERIVATIVES EXCHANGE LIMITED

Transcription

1 NATIONAL COMMODITY & DERIVATIVES EXCHANGE LIMITED Circular to all trading and clearing members of the Exchange Circular No : NCDEX/TRADING-072/2018 Date : November 28, 2018 Subject : Hedge guidelines for Eligible Foreign Entities (EFEs) The Securities and Exchange Board of India (SEBI) has issued a circular on Participation of Eligible Foreign Entities (EFE s) in the commodity derivatives market with an objective to provide suitable framework for allowing foreign participants to hedge their exposure to Indian physical commodity markets. Accordingly, the Exchange has issued circular no. NCDEX/TRADING- 066/2018 dated October 10, 2018 enclosing a copy of the SEBI circular no. SEBI/HO/CDMRD/DMP/CIR/P/2018/134 dated October 09, Exchange has also issued a circular on Participation of members as Authorized Stock Brokers (ASB) vide its circular no. NCDEX/MEMBERSHIP-036/2018 dated November 13, 2018 and a circular on Know Your Client requirements for Eligible Foreign Entities (EFEs) vide its circular no. NCDEX/MEMBERSHIP-038/2018 dated November 16, In continuation of above mentioned circulars on Participation of Eligible Foreign Entities (EFE s) and in terms of the Bye-laws, Rules and Regulations of the Exchange, a comprehensive Hedge guidelines for EFE s is annexed herewith this circular. ASBs and their constituent EFEs are requested to note the same. For and on behalf of National Commodity & Derivatives Exchange Limited Hitesh Savla Executive Vice President For further information / clarifications, please contact 1. Customer Service Group on toll free number: Customer Service Group by to : askus@ncdex.com 1 / 19

2 Contents 1. Definitions 3 2. Eligibility and Jurisdiction: 4 3. Guidelines, Position Limit and other Conditions 5 4. Risk Management and Compliance 7 5. Penal action for non-compliance of hedge limits Application Process and Documentation 10 I. Common documents to be submitted at the time of fresh application 10 II. Documentation after sanction of Hedge Limit 11 Appendix 1 Penal Action 12 Appendix 2 Annexures & Forms 13 2 / 19

3 GUIDELINES FOR GRANTING HEDGE LIMITS TO EFEs 1. Definitions For the purpose of granting of hedge limits in commodities the Exchange defines certain terms as under a) Eligible Foreign Entities (EFEs) EFEs are the Person resident outside India as defined in Foreign Exchange Management Act, 1999 and are having actual exposure to Indian Physical commodity markets. b) Authorized Stock Brokers (ASBs) Authorized Stock Brokers (ASBs) are brokers which are registered under SEBI (Stock brokers and sub-brokers) Regulations, 1992 and are authorized by the Exchange to act as ASB for the purpose of opening of EFE s account. c) Eligible Commodities All commodity derivatives traded on Indian Exchanges except for those contracts having underlying commodity defined as Sensitive Commodity in terms of SEBI Circular SEBI/HO/CDMRD/DMP/CIR/P/2017/84 dated July 25, 2017 or by any other stipulation specified by SEBI which are disclosed on Exchange websites. d) Auditor Auditor under these guidelines would mean statutory auditor or such other authority carrying equivalent function of auditing and assurance in the respective jurisdiction as may be applicable. 3 / 19

4 2. Eligibility and Jurisdiction: a) EFEs shall have actual exposure to Indian physical commodity markets. b) EFE shall be resident in a country / jurisdiction whose securities market regulator and/or commodity derivatives market regulator is a signatory to IOSCO s ( / MMoU (Appendix A Signatories) or a signatory of a bilateral MoU with SEBI ( Provided that such EFE is not a resident in a country identified in the public statement of Financial Action Task Force as: i. a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or ii. a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies. c) If the EFEs are also registered with SEBI as Foreign Portfolio Investors (FPIs) or Foreign Venture Capital Investors (FVCIs) then they are permitted to participate in commodity derivatives markets as EFE provided that they have actual exposure to Indian physical commodity markets and subject to conditions that there is clear segregation of funds / securities / commodities under the respective registrations. d) The minimum net-worth requirement for EFE shall be US$ 500,000 or as prescribed by the Exchange / Clearing Corporation / SEBI from time to time. e) The hedge limit shall be applicable in respect of the long / short open position acquired by EFE against their exposure to Indian physical commodities markets. Broadly, the basis on which hedge limits are considered by the Exchange are as under: i. Import obligation / commitments to India ii. Export obligation / commitments from India iii. Anticipated Imports / Exports based on past track record of Imports/Exports from /to India iv. Any other transactions by which there is an actual exposure to the Indian physical commodity markets and are exposed to price uncertainty of Indian commodity markets. 4 / 19

5 3. Guidelines, Position Limit and other Conditions a) EFE shall be allowed to hedge their exposure to Indian physical commodity markets in eligible commodities traded on the Exchange. b) An EFE can open trading account with only one of the ASB and participate in the commodity derivatives trading through the said ASB on the Exchange platform. c) The EFE desirous of taking hedge position on the Exchange shall make application to the Exchange through their ASB for seeking hedge limit along with the prescribed forms, annexures and documents. d) Open position limit of EFE shall be governed by the hedge limit sanctioned under this guidelines and no separate client trading limit shall be available for EFE. e) At any point of time during the hedge period, hedging positions taken in derivatives contracts by EFE, across multiple Exchanges / Contracts, shall not exceed its actual exposure in the physical market, even if there is a usable hedge limit available as per allocation granted by the Exchange. The tenor of hedge shall not be greater than the tenor of underlying exposure. f) Hedge limits for an EFE will be determined by the Exchange on a case to case basis, depending on applicant s actual exposure to the commodity, hedging requirement and other factors which the Exchange deems appropriate in the interest of market. g) An EFE shall apply for the hedge limits corresponding to its own physical exposure to the commodity and cannot apply for a hedge limit in respect of any stock it holds on behalf of another entity including stock positions it holds on behalf of a group-entity. The limits sanctioned to EFE shall be utilized only by EFE itself and not by anyone else including any subsidiary / associate / holding company. h) The approved hedge limit shall be valid from the date of sanction for a period specified in the sanction letter. Unless renewed, the hedge limit shall stand terminated automatically upon expiry of such period without any notice. The EFE shall apply through ASB for renewal of limits in advance and before the expiry of earlier approval, along with relevant documents as prescribed by the Exchanges from time to time. i) On the start of near month, the position limit shall be equivalent to limit available to regular clients or the hedge limit allocated, whichever is lower. 5 / 19

6 j) The ASB submitting requests for hedge limits on behalf of the EFEs shall undertake proper due diligence by verifying documentary evidence of the underlying exposure and ensure that the hedge limit requested is genuine and does not have the potential to disturb the equilibrium of the market of that particular derivative contracts. k) If under any circumstances an EFE is found availing hedge limit contrary to the guideline framed by the SEBI / Exchange, or submits false document/s or fails to inform Exchange timely about reduction of underlying exposure based upon which it has been allocated hedge limit by the Exchange, it shall be liable for cancellation of the hedge limit and appropriate action including penalties as deemed appropriate by the Exchange l) An EFE having availed benefit of hedge limits, shall preserve relevant records for a period of minimum three years for inspection, if considered necessary. m) The Exchange will disclose on its website the hedge limit allocated to various EFEs, indicating the period for which approval is valid, in an anonymous manner. The disclosure shall be made in the following format. Sr. No. Name of the Commodity Hedger Long Hedge Limit Short Hedge Limit Date of making application Application Approval Date Approval Start Date Date till Approval is valid EFE 1 EFE 2 6 / 19

7 4. Risk Management and Compliance The sanction of the hedge limits, is subject to certain risk management and compliance measures which includes; a) The minimum networth requirement for EFE shall be US$ 500,000 at the time of application and on an ongoing basis or such other networth requirement as defined by the Exchange / Clearing Corporation / SEBI. b) EFE registered with the Exchange will be allotted a unique Participant Code. The Participant Code should be used by the EFE while trading on the Exchange only in those commodities in which the EFE has been sanctioned hedge limits. c) EFE shall ensure that they submit all the required documents as specified by the ASB / Exchange / SEBI or any other law enforcing agencies and shall be responsible for complying with all the relevant laws. d) The documents (formats of which have been annexed) are to be filled up by both the EFE and the registering ASB (as applicable) while applying for the hedge limit and also for any subsequent request for enhancement / renewal of hedge limits. e) The request from a prospective EFE shall be considered by the Exchange only on receipt of all the prescribed documents complete in all respects. The Exchange reserves the right to reject any application from an EFE or to stipulate any additional conditions or ask for additional documentation before and/or after sanctioning hedge limits. f) In case of limits granted based on past track record of imports from or export to India, hedge limit shall be permitted up to the average of previous three financial years actual purchases / sales or the previous year s actual purchases / sales turnover from/to India, whichever is higher, in respect of the desired commodities. In case an EFE has been in existence for less than 3 years, then the applicable time period for exposure calculation shall be for the actual period as may be certified by their auditor. g) An EFE shall be sanctioned hedge limits either for Long positions or Short positions but not for both in same commodity. Hence the applicant has to state clearly if the application is for Long or Short position. A fresh application will be needed if the Hedger needs an opposite position in lieu of the existing sanctioned position. Once the hedge limit is sanctioned for opposite position the erstwhile limit already sanctioned will stand cancelled. 7 / 19

8 h) The EFE s sanctioned limit in a commodity should not be exceeded at any time and under any circumstances. If any violations (including intra-day violations for whatever reasons) are found, the Exchange / Clearing Corporation may not permit taking of any further position by the EFE and may reduce open interest position at market rate, which shall be binding on the EFE and the ASB. EFE shall also refrain from taking any position in unapproved commodity. As there are no client level position limits for EFE, all positions created in linked client code should be taken up by the clearing member of the EFE by end of day through approving the give up trades. i) The registering ASB has responsibilities to; i. Not to put through any trade by an EFEs violating the sanctioned hedge limits or violating any of the terms or conditions on which hedge limits are sanctioned to the EFE by the Exchange. ii. To ensure that the EFEs reduces the open positions in the near month contracts to the extent of near month limits. iii. To immediately inform the Exchange of any violation of limit or terms and conditions by EFEs. iv. To ensure that the EFEs do not churn the hedge positions during the hedge period and that the dynamic hedging facility is not misused. v. To ensure compliance with all the guidelines pertaining to EFEs issued by the Exchange / SEBI from time to time. vi. To ensure compliance with all the guidelines issued for ASB by the Exchange / SEBI from time to time. j) The margins for any commodity prescribed by the Exchange / Clearing Corporation for the other market participants shall also be applicable to the EFE. As the hedge positions are typically larger than the normal client level limits, the ASB shall ensure that appropriate margins are collected upfront as risk mitigation. If in the assessment of the ASB, the risk profile of the EFE warrants margins in addition to the Exchange / Clearing Corporation stipulated margins, the member shall collect such additional margins. The margins collected by the member at no time shall be less than those stipulated by the Exchange / Clearing Corporation. 8 / 19

9 k) Hedge limits can be utilized till underlying exposure in Indian physical commodities market are open. Positions established in the hedge code can be liquidated in an orderly manner in accordance with sound commercial practices. l) The EFE shall not undertake any arbitrage / speculative transactions and the initiation and unwinding of hedge positions should correspond to the underlying position in the physical markets. The quota for hedging shall be used to only hedge / unwind the hedge. The contracts, once cancelled, cannot be rebooked. The contracts may, however, be rolled over on or before maturity subject to maturity of the underlying exposure. Though the hedge positions can be liquidated based on sound commercial reasons, the company / client shall not churn (frequent unwinding and reinitiating) the hedge positions during a hedge period for whatever reasons. For this purpose the hedge period is defined as the time between initiation of hedge position in a derivative contract and the time of expiry of the contract. The Exchange shall be the sole authority in determining whether frequent churning is happening in EFE s position or not and the decision of the Exchange in this regard shall be final and binding on all parties involved. This shall be determined on the basis of: i. Statements submitted by the EFE to the Exchange on a periodic basis, showing the summary of corresponding physical market transactions with respect to the unwinding / reinitiating of positions under the hedge limits. ii. Any additional hedge document which the Exchange may seek in this regard or any audit / inspection if considered necessary, depending on circumstances. m) All parties to the limits sanctioned to an EFE, i.e. the EFE and the registering ASB shall abide by the Rules, Bye-laws and Regulations of the Exchange, Clearing Corporation and directions of the Regulator in India and in the jurisdiction of the EFE, if any, apart from the terms and conditions under which the hedge limits are sanctioned. Any violation may result in cancellation of the hedge limit and appropriate action including penalties on the constituent and / or other concerned parties as deemed appropriate by the Exchange. 9 / 19

10 5. Penal action for non-compliance of hedge limits It would be incumbent upon the ASB to ensure that they as well as their EFE clients comply with the terms and conditions governing the EFE s Hedge limits. Any violation may result in cancellation of the hedge limit and appropriate action including penalties on the constituent and / or other concerned parties as deemed appropriate by the Exchange. 6. Application Process and Documentation I. Common documents to be submitted at the time of fresh application a) Brief profile of Business of the EFE client along with: i. Details of import / export from / to India during past three years, certified by auditor. In case an EFE has been in existence for less than 3 years, then the details for the actual period as certified by auditor. ii. Board resolution certifying Board approved policies which define the overall framework within which it proposes to conduct its hedging activities. iii. Financial Statement / Annual Report for the three years immediately preceding the date of application. For the EFEs which are in existence for less than three years as on the date of application, the financial statements covering the whole period of existence shall be submitted. iv. Latest Net worth Certificate applicable as on the date of application. v. KYC details submitted by EFE with ASB b) Request Letter for Hedge limit c) Request for participation code (CP Code) (to be filled in by the ASB) (Annexure 1) d) Joint declaration from the ASB and the EFE client (Annexure 2) e) Statement of import or export obligation / commitment certified by the auditor(annexure 3) f) Certificate of import / export turnover of the EFE during past 3 years (Annexure 4) g) Statement on hedge rationale and hedge strategy (Annexure 5) h) Details of other back to back trades, cross hedging positions, hedging positions on other Indian Exchanges (if applicable) certified by auditor (Annexure 6) 10 / 19

11 II. Documentation after sanction of Hedge Limit a. Renewal - At the time of renewal of hedge the EFE has to meet all eligibility criteria and submit following documents i. Request Letter for renewal of Hedge limit ii. Statement of import or export obligation certified by Auditor. (Annexure 3) iii. Certificate of import / export turnover of the EFE during past 3 years (Annexure 4) iv. Statement on hedge rationale and hedge strategy. (Annexure 5) v. Details of other back to back trades, cross hedging positions, hedging positions on other Indian Exchanges (if applicable) certified by Auditor. (Annexure 6) vi. Any change to the information including the networth certificate provided in the application / submission as mentioned above in Para I above along with documentary evidences supporting the same if applicable. b. Quarterly Documents i. Statement of import / export obligation and fulfilled contract as certified by the auditor. (Annexure 3) ii. Audited summary of import or export details / documents in the form of invoice or shipping / cargo bills, containing information like Date of Dispatch, Tentative date of arrival, Quantity on that invoice / bill etc. iii. Details of other back to back trades, cross hedging positions, hedging positions on other Indian Exchanges (if applicable) certified by Auditor. (Annexure 6) iv. Any change to the information provided in the most recent application / submission as mentioned above in Para I and II (a) above along with documentary evidences supporting the same if applicable. Above quarterly documents should reach the Exchange not later than last day of succeeding month. c. Annual documents i. Annual Financial report and Net worth Certificate issued by Auditor ii. Where hedge limit is sanctioned based on prior import / export commitments / contracts, a statement showing subsequent performance of such contracts and the corresponding hedging proposed to be undertaken, as certified by an auditor. iii. EFE / ASB shall be required to submit a consolidated statement on an annual basis covering the actual physical exposure in the Indian commodity markets and hedge positions taken on the Exchange. 11 / 19

12 Appendix 1 Penal Action Penalties to be levied and other penal actions that would be initiated by the Exchange for non-compliance of provisions governing Hedge limits Sr. Nature of violation No 1. Violation of hedge limits as prescribed by the Exchange or violation by continuing to avail hedge limit even when there is no corresponding physical exposure 2. Submission of forged/fake documents for availing hedge limit 3. Procedural violation of terms and conditions of approval of Hedge limits and Hedge guidelines as amended from time to time 4. Any violation or non-compliance not covered above Action The penalties as prescribed by the Exchange from time to time for violation of client level open interest limits Suspension of hedge code together with financial penalty as deemed appropriate by the Exchange As may be decided on case to case basis by the Exchange As may be decided on case to case basis by the Exchange Any penalty incumbent on EFE shall be recovered from the ASB. 12 / 19

13 Appendix 2 Annexures & Forms REQUEST FOR PARTICIPATION CODE (To be filled in by the ASB) Annexure 1 1. Name of registered Member 2. Member Code 3. Name of the Client applying for participant code 4. Status of the EFE (Individual/Corporation/Partnership etc) 5. Address of the EFE (Corporate Office) P I N 6. Telephone No 7. Fax No Client code allotted Signature of Authorised Signatory of the EFE Signature of the Authorised signatory of ASB Name: Designation: Name: Designation: Place: Date:

14 JOINT DECLARATION (To be filled in by the EFE and the ASB) Annexure 2 We hereby declare that the information given in this form and the Annexure/s hereto are true and correct to the best of our knowledge. We shall intimate the Exchange any material change in the facts mentioned herein above as soon as possible. We shall abide by the terms and conditions under which the hedge limits will be sanctioned by the Exchange. We shall also abide by the Rules, Bye-laws and Regulations of the Exchange and shall not involve in any activity prohibited by Rules, Bye-laws and Regulations of the Exchange. Declarations and undertakings confirming compliance with all laws, rules and regulations applicable in India and in jurisdictions where the EFE is located is obtained from EFE. We shall trade only in approved commodity as per the hedge limit sanctioned to the EFE and shall not trade in any restricted or unapproved commodities. We confirm to be aware of list of eligible commodities approved for EFE i.e. commodity which are not categorised as sensitive commodity. We agree and undertake to ensure to have following: We confirm that EFE has opened a single non-interest bearing Rupee account with an AD Category-I bank in India for routing the receipt and payment for transactions. Details of accounts are submitted at the time of KYC registration. EFE undertake to open trading account with only one of the ASBs and participate in the commodity derivatives trading through the said ASB. EFE shall place orders for trading only through their ASBs on the Exchange platform. I/We are aware that no separate client trading limits shall be allowed for EFEs. All position shall be held in separate hedge code issued by the Exchange. I/We undertake that I/we shall not violate the hedge limits as sanctioned to me/us. The hedge limits as sanctioned to me/us shall be subject to SEBI circular no. SEBI/HO/CDMRD/DMP/CIR/P/2018/134 dated October 09, 2018 on Participation of Eligible Foreign Entities (EFEs) in the commodity derivatives market.

15 EFE have clear segregation of funds / securities / commodities under the respective registrations, if EFE is registered Foreign Portfolio Investors (FPIs) or Foreign Venture Capital Investors (FVCIs) with SEBI. Signature of Authorised Signatory of the EFE Signature of the Authorised signatory of ASB Name: Designation: Name: Designation: Place: Date:

16 STATEMENT OF IMPORT / EXPORT FOR THE PERIOD Annexure 3 Part A - Details of Import / Export / Outstanding as on Sr. No Contract Number Contract Date Commodity Name of the Counterparty Total Quantity Total Quantity Outstanding Quantity Shipment period Part B - Details of Import / Export fulfilled during the period (Not applicable at the time of application) Sr. No. Contract Number Contract Date Comm odity Name of the Counterparty Total Quantity Total Quantity Shipment period Received. / Dispatch Date Received. / Dispatch Quantity Balance Quantity Note: Supporting proof of Import and/or Export in the form of invoice or shipping/cargo bills. In case of Export/import commitments, documents like proof of export / import commitments and any other relevant documents. Signature of Authorised Signatory of the EFE Signature of Auditor Name: Designation: Auditor s Name: Registration No: Place: Date:

17 Annexure 4 CERTIFICATE OF IMPORT / EXPORT TURNOVER OF THE EFE DURING PAST 3 YEARS Period Year Commodity Import from India Export to India Year 1 Year 2 Year 3 Average Quantity/ Value Unit Quantity / Value Unit In case an EFE has been in existence for less than 3 years, then the applicable time period for exposure calculation shall be for the actual period as may be certified by the auditor. Signature of Authorised Signatory of the EFE Signature of Auditor Name: Designation: Auditor s Name: Registration No: Place: Date:

18 STATEMENT ON HEDGE RATIONALE AND HEDGE STRATEGY (On the letter head of EFE seeking the Hedge limit) Annexure 5 Name of the commodity: Long / Short hedge : Hedge Requirement (In Quantity) : Rationale / reasons for obtaining hedge : Hedge strategy : Signature of Authorised Signatory of the EFE Name: Designation: Place: Date:

19 Annexure 6 DETAILS OF OTHER BACK TO BACK TRADES, CROSS HEDGING POSITIONS, HEDGING POSITIONS ON OTHER INDIAN EXCHANGES IN (NAME OF COMMODITY) AS ON Particulars Other back to back trades Cross hedging positions Hedge positions on other Indian Exchanges Quantity We hereby declare that the above information is true and correct to the best of our knowledge. Signature of Authorised Signatory of the EFE Signature of Auditor Name: Designation: Auditor s Name: Registration No: Place: Date: