Reserve Bank of India issued Guidelines with regard to the Derivative Deals by Banks

The Reserve bank of India issued fresh guidelines with regard to the derivative deals by banks in India. The modification in RBI's guidelines on derivatives was introduced in the backdrop of corporates dragging banks to the courts when their derivative bets suffered due to adverse currency movements.

The Reserve Bank of India has asked banks to obtain board resolutions from companies on their risk management policy before offering derivatives products.

Banks generally 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 guidelines on risk identification, management and control.

RBI's guidelines are aimed at protecting 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.
The board-approved risk management policy of corporate 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 deal with the accounting policy and disclosure norms to be followed in respect of derivative transactions.
 Since banks are well-regulated by the Reserve Bank of India, the modified guidelines issued by the RBI on derivatives are a way of ensuring responsible market behaviour by corporates through banks.

RBI mentioned that the responsibility of Customer Appropriateness and Suitability review rest on banks, bank's compliance officer ought to submit a monthly report to the Board of Directors of the bank certifying that all the guidelines had been followed for all derivative transactions undertaken by the bank.