SBP revises forward cover rules

RECORDER REPORT

KARACHI: The State Bank of Pakistan (SBP) has with immediate effect revised and streamlined the instructions on forward cover facilities being provided by authorised dealers (banks) against imports and foreign private loans.

Maturity of forward contracts against import should coincide with the maturity of the underlying Letter of Credit (L/C), says FE Circular No. 06 of December 21, 2011. In cases where the import Letter of Credit has a tenor of more than 12 months, the tenor of the forward cover facility would be 12 months on rollover basis or the remaining tenor of the L/C, whichever is less, subject to the condition that the tenor of the forward cover should not be for less than one month, the Circular said.

Similarly, the minimum tenor of forward cover against foreign private loans shall be twelve months, or remaining maturity of the underlying foreign private loan, whichever is lower. In either case, no forward cover facility will be provided for a period of less than one month, says another FE Circular No. 07 of December 21, 2011. In cases where the underlying foreign loans have a tenor of more than 12 months, the tenor of the forward cover facility would be 12 months on rollover basis or the remaining tenor of the loan, whichever is less; subject to the condition that the tenor of the forward cover should not be for less than one month, the Circular said.

According to the FE Circular No. 06 if the terms of the Letter of credit are amended to extend its tenor in accordance with the regulations stipulated in Para 9 of Chapter XIII of the Foreign Exchange Manual (FEM) - 2002, the importers can roll over the forward cover on the original maturity date of the forward contract coinciding with new maturity of the underlying L/C, subject to the condition that the forward cover is not less than one month.

All forward contracts against which the underlying L/Cs are cancelled are required to be closed out on maturity at prevailing exchange rates and differential is settled between the importer and the bank. However, all such cases, where underlying L/Cs were cancelled will be submitted to Domestic Markets & Monetary Management Department (DMMD) on the date of cancellation of L/Cs with full details as per prescribed format, and justification, for further action by SBP as deemed appropriate in terms of regulations under the FERA Act, 1947, the circular added.

Forward cover already provided to customers prior to the effective date of this circular (FE Circular No. 07) shall remain effective till their maturity. Any rollover of the said contract shall, however, be in accordance with revised instructions contained herewith, FE Circular No. 07 said.

In terms of instructions contained in the above-mentioned circulars and in F.E. Manual 2002, banks will ensure ab initio that the facility is being availed for genuine transaction and that the customers do not hedge more than the underlying exposure. Furthermore, if during SBP's inspection or at any point of time, it is found that the said facility was misused and was against genuine transactions, action will be taken by SBP under Foreign Exchange Regulation Act, 1947, against the concerned bank and the customer.