The Reserve Bank of India has asked banks to obtain board resolutions from companies on their risk management policy before offering derivatives products.
The RBI said that banks should not undertake derivative transactions with, or sell structured products to, users who do not have properly documented policies regarding management of risks that include, among other things, guidelines on risk identification, management and control.
Reports said that the modification in RBI’s guidelines on derivatives has come in the backdrop of corporates dragging banks to the courts about two years back when their derivative bets went wrong due to adverse currency movements.
The objective of the RBI’s guidelines is to protect the banks against the credit, reputation and litigation risks that may arise from a user’s inadequate understanding of the nature and risks of the derivatives transaction.
Reports said that the board-approved risk management policy of corporates, as envisaged by the RBI, should have guidelines and procedures to be followed with respect to revaluation and monitoring of positions.
The policy should contain names and designation of officials authorised to undertake transactions and limits assigned to them; and a requirement that the assignment of limits to an official would be specific.
The policy should also deal with the accounting policy and disclosure norms to be followed in respect of derivative transactions; a requirement to disclose the MTM valuations appropriately; mechanism regarding reporting of data to the Board, including financial position of transaction, and so on.