Anti-Money Laundering Guidelines for Authorized Money Changer

INTRODUCTION TO FOREIGN EXCHANGE MARKET GLOBAL FOREIGN EXCHANGE MARKET

2 DOMESTIC FOREIGN EXCHANGE MARKET

5GLOBAL FOREIGN EXCHANGE MARKETHISTORY OF THE GLOBAL FOREX MARKET

The Foreign Exchange market, also referred to as the "Forex" or "FX market is The largest financial market in the world, with a daily average turnover of US$1.9 trillion -- 30 times larger than the combined volume of all U.S. equity Markets. "Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for Example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buys or sells products and services in a foreign country or must convert Profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation. For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, and Canadian Dollar and Australian Dollar. A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political Events at the time they occur - day or night. The FX market is considered an Over the Counter (OTC) or Interbank market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets. If you are interested in trading currencies online, you will find that the Forex Market offers several advantages over equities trading. 24-Hour Trading Forex is a true 24-hour market, which offers a major advantage over equities trading. Whether it's 6pm or 6am, somewhere in the world there are always Buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours Earning reports or analyst conference calls. After hours trading for U.S. equities brings with it several limitations. ECNs (Electronic Communication Networks), Also called matching systems, exist to bring together buyers and sellers - when Possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, traders must wait until the market opens the following day in order to receive a tighter spread. Superior Liquidity With a daily trading volume that is 50 xs larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major Currencies, helps ensure price stability. Traders can almost always open or Close a position at a fair market price. Because of the lower trade volume, investors in the stock market are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.100:1 Leverage

100:1 leverage is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by equity brokers. At 100:1, traders post $1000 margin for a $100,000 position, or 1%.While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day. The most effective way to manage the risk associated with margined trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a system where your controls kick in when emotion might otherwise take over.Lower Transaction Costs

It is much more cost-efficient to trade Forex in terms of both commissions and Transaction fees. FOREX.com charges NO commissions or fees whatsoever, while still offering traders access to all relevant market information and trading Tools. In contrast, commissions for stock trades range from $7.95-$29.95 per Trade with online discount brokers up to $100 or more per trade with full Service brokers. Another important point to consider is the width of the bid/ask spread. Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip is .0001 US cents) in the major currencies. In general, the width of the spread in a Forex transaction is less than 1/10 that of a stock transaction, which could Include a .125 (1/8) wide spread. Profit Potential in both Rising and Falling MarketsDOMESTIC FOREIGN EXCHANGE MARKETINDIAN ECONOMYEmerging and growing

The financial landscape has changed forever. There are now new rules of the game. Change is the only constant. Technology has made the effects of change manifest quicker. Forex business seeks new and better ways to address the challenges and opportunities in this new market economy. At the centre of all activities is the client around whom the full market revolves, the companies constantly innovate and refine wealth management practice to create a better product and service. Nowadays we find forex market is more Professional, the money changer with their ability builds long term relationships with their client and understand their problems and provides a unique solution which adds to their business objectives. As India, steps out post liberalization by plugging into the global economy many Indian corporate entities are thinking globally. There is no reason why Indian investors in India and abroad be left behind and not take advantage of this new investment climate. Ability to see the bigger picture enables. Various Investment Company do guide investors, for their investments. They actively meet various industry leaders to understand their vision, thinking, and long term plans. Also they find new regulatory environment that offers greater transparency and innovation. This companies draw rich experience and expertise to advise clients so they are either able to take advantage of the opportunities or weather the adverse business environmentsGUJARAT MARKET Gujarat Foreign Exchange market is highly potential market. As per the study done it was found out that due to high industrial investment in Gujarat it is predicted that Foreign Exchange market will rise in near future. As per the 15 sample taken from FFMCs and 2 A.D.s it was found that Gujarat market is growing specially Saurashtra region and Kutch. The reason is because a big investment is going to be their in near future as a result money changer finds a very good corporate business out their in this region. As far as the main land of Gujarat is concern it was found that more and more people are going abroad for either study or for immigration. Specially kheda district which is highest potential for doing foreign exchange business.MAJOR FOREIGN EXCHANGE TERMFOREIGN EXCHANGE TERM FX = Foreign Exchange RBI = Reserve Bank Of India

AD = Authorized Dealers

FFMC = Full Fledge Money Changer

RAD = Restricted Authorized Dealer

AP = Authorized Person

LERMS = Business Travel Quota

MC = Money Changer

AMC = Authorized Money Changer

MLRO = Money Laundering Reporting Officer

FIU = Financial Intelligence Unit

OBU = Offshore Banking Unit

RRB = Regional Rural Banks

AML = Anti Money Laundering

KYC = Know Your Customer

BTQ = Basic Travel Quota

CDF = Currency Declaration Form

TC = Travelers Cheque

IRS = Interest Rate Swaps FR = Forward Rates CR = Cross Rates

NCD = National Currency

ECU = European Currency Unit.

FCY = Foreign Currency BOP = Balance of Payments

ECN = Electronic Communication Network SWIFT = Society for world wide international financial telecommunication. CHIPS = Clearing house Interbanks payment system LIBOR = London Interbanks online /offered rateCURRENCYMAJOR

USD = US DOLLAR GBP = STERLING POUND AUD = AUSTRALIAN DOLLAR CAD = CANADIAN DOLLAR

EUR = EURO JPY = JAPANESE YEN/100

CHF = SWISS FRANCOTHERS

BHD = BAHRAIN DINAR CYN = CHINESE YUAN DKR = DANISH KRONER

EGP = EGYPTIAN POUND HKD = HONG KONG DOLLAR KD = KUWAIT DINAR MYR = MALAYSIAN RINGGIT NZD = NEW ZEALAND DOLLAR NKR = NORWEGIAN KRONER OMR = OMANI RIYAL QTR = QATAR RIYAL SAR = SAUDI RIYAL SGD = SINGAPORE DOLLAR

ZAR = SOUTH AFRICAN RAND

SKR = SWEDISH KRONER

SYP = SYRIAN POUND

THB = THAI BHAT

AED = UAE DIRHAMS

BASICS OF FOREIGN EXCHANGE WHAT IS FOREIGN EXCHANGE?

11 WHAT IS FUNDAMENTAL ANALYSIS?

12 WHAT IS TECHNICAL ANALYSIS?

13 WHAT IS FOREX RISK MANAGEMENT

15 EMERGING PRODUCTS

16 WHY DOES IT EXIST?

23 HOW ARE FX MARKETS ORGANIZED?

24 WHO ARE THE PLAYERS?

25 THE MECHANICS OF FOREIGN EXCHANGE RATE QUOTATION

27 EURO WHAT IS THE CURRENCY

30 THE MECHANICS OF FOREIGN EXCHANGE CROSS RATES

31 THE MECHANICS OF FOREIGN EXCHANGE FORWARD RATES

32 THE DRIVERS OF FOREIGN EXCHANGE

35 CENTRAL BANK POLICY

40 FOREX VS. EQUITY

41 FOREX VS. FUTURES 44WHAT IS FOREIGN EXCHANGE? Foreign Exchange is essentially the area where a nations currency is exchanged for that of another. The foreign exchange market is the largest financial market in the world, with over $ 1.7 trillion being traded on a daily basis with only 25% of this amount being in actual merchant position. The rest of the amount denotes trading or speculation that is the principal reason why currency markets are extremely volatile, being at least ten times faster than stock markets in any country. Unlike other markets, Forex markets have no physical location or central exchanges and operate through an electronic network of banks and corporations. It is for this reason that Forex markets operate on a 24-hour basis, spanning from one zone to another across major financial centers. It is for this reason that constant monitoring across time zones are required so as to negate adverse movements or book extra-ordinary profits. WHAT IS FUNDAMENTAL ANALYSIS? It is one of the two main approaches of analyzing and forecasting currencies and basically comprises of financial situations, economic theories and political developments. Thus the health of a currency of a particular country would be dependent upon growth rates of GDP, interest rates, inflation, unemployment, money supply and foreign exchange reserves. While stock markets, bonds and real estate prices would affect the state of a currency, the state of a government and natural calamities if any would also be major influences. Government Policies of a particular country also have impact on their currency. Currencies may be pegged to a particular major currency or it may be partially or fully convertible which would dictate the extent to which a currency would be open to outside influence. Also, Central Banks of a country intervene either singly or in conjunction with another Central Bank to move or strengthen/weaken its currency by either intervening directly or by moving interest rates which should be taken into consideration while evaluating the health of that particular currency.

WHAT IS TECHNICAL ANALYSIS? Technical analysis is a method of forecasting price movements by looking at purely market-generated data. It is basically different methods of charting and mathematical tools to analyze movements of price. Price itself has been defined in many ways but to grasp technical analysis, we must be able to understand the meaning of price. Price would best be defined as a figure, which moves between panic, fear and pessimism of the crowd in one hand and confidence, excessive optimism and greed on the other. Thus Technical Analysis is a method of predicting future price movements by examining the past pattern of movements in those prices. These movements are depicted in Charts and Diagrams, which are analyzed to point our major and minor trends so as to pinpoint points of entry into and exist from markets.TREND One of the first things to learn is that the market is supreme and thus at no point should one try to over-rule the underlying trend of a market. The Trend is the Biggest Friend and it is always wise to catch that signal. One should only enter the market after identifying the long term and them the intermediate and short-term trend of the market. As regards patterns of currency movements remember that a currency always goes UP by the LADDER BUT comes DOWN by a LIFT.

RELATIVE STRENGTH INDEX (RSI) RSI reflects the overbought or oversold position of a market. For this calculation, to compute support the RSI figure should be taken at 70 and for the purpose of Resistance, RSI should be taken at 30. However, this method should ideally be used in a consolidating market and would best be avoided in a trending market.

BOLLINGER BANDS This tool carries the advantages of other tools and tried to nullify their disadvantages and is calculated at 1.95/2.00 Standard Deviation of the Moving Average (usually 20 day period) which results in an envelope within which majority of the prices move. The bands of this envelope act as support and resistance so it is easy to buy at the lower end of the band and sell at the upper end. Entry and exit should best be done when a price has closed outside the band and is definitely a leading indicator.

ELLIOT WAVE ANALYSIS

This is done by classifying prices into patterned waves that can indicate future targets and reversals. Waves moving with the trend are called impulse waves and waves moving against the trend are called corrective waves. These Impulse and Corrective waves are broken down into five primary and three secondary movements respectively which forms a complete wave cycle and these can be further subdivided. These wave patterns needs to be identified so as to predict accurately and is best used in conjunction with the Fibonacci theory.

WHAT IS FOREX RISK MANAGEMENT? Forex Risk Management refers to scientific study of currencies and devising various hedging techniques based of predictions of such currencies. The expected movements might be either in favor or against the underlying exposure of a particular organization, and as such the hedging mechanisms should be geared to extract the maximum profit of / reduce potential losses arising from such trends.

Though the studies of currencies are based on fundamental and technical analysis, expected trends are also greatly influenced by the sentiments of the market which can best be assessed from an inter-bank dealing room where inter-bank trades takes place. Eforexindia is equipped with professional dealers and state of the art technology and is backed by the dealing room of its parent concern M/s S.C.Dutta & Co. The various studies and risk management strategies, which are done to estimate risk arising from the forex exposures of an organization, are: Exposure Analysis Currency and Market Forecasts.

Risk Appraisal and Evolving a Foreign Exchange Risk Management Policy.

Setting up Risk Management Goals.

Formulating Hedging Strategies Designed to meet such Goals.

Implementing such strategies with the assistance of our highly equipped Dealing Room.

Structured Review / Analysis.

Daily Currency Updation with Weekly and Special Forex Reports.

EMERGING PRODUCTSA. INTEREST RATE SWAPS An IRS can be defined as a contract between two parties (called Counter Parties) to exchange, on a particular date in the future, one series of Cash Flows ( fixed interest) for another series of Cash Flows (variable or Floating Interest) in the same currency on the same principal amount (called Notional Principal) for an agreed period of time. The two payment streams are called the legs or sides of a swap. The exchange of Cash Flows need not occur on the same date. This means payment may be different for each side of the swap. So the variable rate may be paid monthly and the fixed quarterly, in which case the pricing of the swap can allow for discounted timing cost. Swaps, unlike FRAs, generally do not net settle the difference between the agreed fixed interest rate and the Variable interest rate. Netting of payments is however allowable. The Floating rate of interest is referenced to a short-term interest rate like the LIBOR in the international market or the MIBOR in the Rupee market. The Floating Rate used as benchmark or index is RMIBOR (Reuters Mumbai Inter Bank Offered Rate) or N-MIBOR (NSE Mumbai Inter Bank Offered Rate). The reset frequency for the floating rate index is the term for the interest rate index itself. However, the reset frequency for the floating rate does not necessarily match the timetable of the floating rate index. Therefore the floating rate may be set daily, weekly, month, quarterly while settlement dates may fall monthly, quarterly, semi-annually etc. If the reset date and the settlement date do not coincide, the swap is said to be paid in arrears set in advance.

QUOTING OF SWAP POINTS

The pricing of swaps is against the fixed interest rate. At the start of a swap, the expected NPV is zero for both counterparties. Theoretically, the floating legs worth is the same as those of a fixed rate leg and thus swaps are a zero sum game at the inception. In case at the inception the NPVs are not exactly equal, one party pays higher to compensate the price. Generally, swaps have been quoted in a number of ways, but the most commonly used is setting the floating rate equal to a short term index (such as a given maturity of MIBOR) with no margin or plus/minus a given margin, which are payable in the money market by the counterparties. When no margin is added to a floating rate, such rate is said to be quoted 'Flat'. The price of a Fixed /Floating swap is quoted in two parts : a fixed interest rate and a short term index upon which the floating rate is based. The convention is to quote All-In-Cost (AIC) which means the fixed interest rate is quoted relative to the floating rate index without any margin. After having set the floating rate, the fixed rate is set appropriate to it. Each bank quotes its own swap rate to exchange fixed cash flows interest for floating in each maturity. Further one should take care of different day count conventions to calculate interest that is 30 days month means 360 days a year or actual number of days elapsed since the previous settlement is due based on a 360 days year.EFFECT OF RATE CHANGES ON AN IRS Floating Rate payers will gain if interest rate falls, as they will have to pay lesser interest whereas fixed rate payer will loose as they are locked in fixed rate. In case the Interest rate rises, The Floating payer will loose and the Fixed rate will gain.

UNWINDING SWAPS The party who wishes to unwind a swap has the following three alternatives:

Swap Buy-Back / Closeout/ Termination/ Cancellation. Swap Reversal with new swap equaling the remaining period of original swap with Same Reference Rate and Same Notional Principal.

Swap Sale or Assignment

THE MECHANISM OF IRS It is a known fact that investors willing to invest in fixed rate instruments are more sensitive to credit rating of the issuer than credit rate lenders. To compensate for this a higher premium is demanded from the issuer of lower credit quality in the fixed rate debt market than floating rate market. The counterparties obtain an arbitrage by drawing down funds where they have greater relative cost advantage, subsequently by entering into an IRS to cover the cost of funds so raised from a fixed rate to a floating rate ad vice-versa. Here it is a win-win situation. Therefore two companies can come together to an agreement such that both can reduce their cost of borrowings. The fact that such opportunities exist is due to imperfection in the money market that is the difference in risk-premium in fixed and floating market. An example will illustrate the point: Suppose that there are two parties to the swap viz. X and Y and a dealer arranges a swap taking a margin (spread). The deal is for Rs. Hundred Million in One Year. The other related data are hereunder.

XYQuality Spread

Credit RatingAAABBB

Fixed Rate Cost8%10%2%

Floating Rate Cost (FR)FR+100bpFR+150bp50bp

Quality Spread Differential 1.5%

It is clear from the above that each of the parties have a comparative advantage in either the floating or fixed rate market. The company X can borrow more cheaply than Y both fixed and floating loans, but its comparative advantage is in fixed rate market whereas Y has an advantage in the floating market. But X wants to be a floating rate payer and Y a fixed rate payer. One way which will divide the gain equally is for X to actually borrow at fixed rate and service floating rate in the swap and Y to borrow in floating and service fixed. But there are other methods of reaching the same goal and is generally done through an intermediary who takes credit risk on each counterparty. Suppose the swap dealer quotes 7.50/100 for the swap: In the swap, X, the floating payer

Pays floating to the swap bank at the prevailing rate.

Receives fixed rate 7.5%

Pays fixed rate 8%

Receives floating rate from the swap bank at the prevailing rate. The net cost of funds and savings to X and Y using the swap arrangement can be worked out clearly. With swap X makes a payment of Floating rate to bank at 8% and receives 7.5% from swap bank. Thus his cost is floating rate + 50 bp. Without swap on the other hand his cost would be Floating rate +100bp. For Y with swap will involve a payment of Floating rate +150bp to swap bank and receive 8% from swap bank. His borrowing cost would be Floating Rate + 150bp + 8% - Floating Rate. Thus we can observe that X and Y are not only better by 50bp but also the swap bank has made a margin of 50bp (8%-7.5%). Thus the gain has been shared out between the swap parties and the bank is 150bp that are equal to the Quality Spread Differential in two markets.USAGE OF SWAPS

Interest Rate Swaps are used to achieve one of the following:

To lower the cost of borrowings as compared to those otherwise available in the market or from bank.

To hedge against, or speculate upon Interest Rate Movements. To obtain fixed rate financing when it is impossible to access the market directly.

B. FORWARD RATE AGREEMENT (FRA) A FRA is an agreement between two counter-parties to pay or receive the difference (called settlement money) between an agreed fixed rate (the FRA rate)

the interest rate prevailing an a stipulated future date (Fixing Date),

Based on a notional amount for an agreed period.

In short, in a FRA interest rate is fixed now for a future period. The special feature of FRA is that the only payment is the difference between the FRA rate and the Reference rate and hence is single settlement contracts. As in IRS, the principal amount is not exchanged.

The settlement sum is calculated on the fixing date by discounting the difference between the previously contracted FRA rate and the then prevailing Reference rate. Money changes hand only on the settlement day and not on the transaction day or the maturity date. So if an investor wants to lock in reinvestment rate of January 3rd 2000 for 90 days and is quoted a FRA of 7 / 7.5% , it means he can lock-in an interest rate of 7% if he wishes to protect himself from a falling interest rate or 7.5% if he is concerned that interest rate will go up. The settlement date will be two days before the value/maturity date.FRAs are expressed in terms of giving or receiving the fixed rate Vs short term interest rate index and are quoted numerically like

3 months rate starting in 3 months time is 3/6

3 months rate starting in 6 months time is 6/9

6 months rate starting in 3 months time is 3/9

Two-way quotes are available in the market and levels can be found on the Reuters (MIBORO2). The lower rate is the bid at which the bank is ready to pay fixed and the higher rate will be the offer rate at which the bank will be ready to receive fixed. We take the case of a borrower who has obtained a one-year credit amounting to Rs.10 lakhs on September 5th 1999. The interest rate is based on 6 months MIBOR. For the first six months MIBOR has already been fixed. Now he is not confident about the second six months, as he is not confident about what he has to pay and apprehends rates to rise. To protect himself he can buy a FRA for the next 6 months with a matching notional principal. Suppose a bank quotes him for 6X12 FRA 9.10 / 90 on September 3rd itself. He can lock in at 9.90% by buying 6X12 FRA on Sept 3rd itself for the period Sept 5th `99 to Sept 4th `2000. On 3rd March 2000 the 6 months MIBOR will be known (we assume 10%) and on that date the 6m MIBOR rate is compared with the FRA rate and the settlement amount is computed by discounting back to the beginning of the contract period using the formula below: SA = ((SR FRA) X NP X CP) / 360 + ( SR X CP ) Where SA is Settlement Amount, SR is Settlement Rate, NP is Notional Principal and CP is Contract period. Using the data in our example we get : (.10 - .099) X 10, 00,000 X 182 / 360 + (.10 X 182) = Rs. 481.23 Thus the borrower would receive Rs.481.23 and this amount will be used to pay the extra 10bp (10% -9.9%). It is clear from the calculation that the net cost to the borrower will be the same as agreed under the FRA contract in both the cases. It should be remembered that the counter-party of a customer is always a bank as there is no secondary market and an FRA price should be analyzed /calculated by always keeping the corporates point of view and not that of the market maker or the bank. There is no restriction on the Notional Principal of FRA/IRS and any domestic money market or debt market can be used as benchmark to enter into FRA/IRS once the basis is computing is acceptable to both the parties. There is various Exposure and Capital Adequacy Norms that are laid down by the apex bank to whom all such deals have to be reported on a fortnightly basis. However the derivative market in India is at a nascent stage with an underdeveloped MIBOR market, absence of big public sector banks, uniform pricing mechanism and of course a shaky approach which is more psychological than lack of knowledge of the product and thus care should be taken in the initial stages by engaging professional consultants to avoid untoward losses by either not using the instrument available or using it in an erroneous manner.WHY DOES IT EXIST? Foreign Exchange (FX) is the buying and selling of foreign currencies. A FX Rate expresses the relationship between two national monies. It is the price of one currency in relation to another. The FX Market is similar to any other financial market except that the commodity being bought and sold is foreign currencies. Traditionally, FX was used primarily for international trade. This includes payment for imports and receipts for exports. With technological advancement and increase in cross-border investments, the service sector began to make increasing demand on the FX Market. Uses include payment for transportation, interest and dividend payments and foreign travel. Today, financial markets and increased foreign direct investments have substantially added to the need for FX. These include money and capital movements for fixed assets, stocks / bonds and currency depositsHOW ARE FX MARKETS ORGANIZED? The FX market is organized into two broad categories: the bank note market and the Interbanks market. Bank note transactions, the most common of which are for obtaining foreign currencies for travel purposes, occur at commercial banks and FX currency changers. The Interbanks has no central geographical location for FX trading. Transactions are conducted entirely through telecommunications systems such as wire transfers.WHO ARE THE PLAYERS? There are various players in the market. They include businesses, central banks, individuals, and commercial banks. There are two sides to the FX market: the wholesale and the retail side. The wholesale side consists of commercial banks. This is the interbank market which is made-up of a group of market makers; i.e. their trading levels set indicative rates for the rest of the market. The other players represent the retail side as each player, or market-taker, interacts with a commercial bank.Central banks can influence interbank trading rates and volume through both policy measures and buying and selling in the FX market. Examples include Federal Reserve Bank of the US, Bundesbank of Germany, and the Bank of Japan. Some of their objectives are to manage the value of domestic currency vis--vis foreign currencies, intervene in support of economic policy objectives, and manage foreign currency reserves.

Commercial banks are the Interbanks players. Examples include Citibank, and the Hong Kong Shanghai Banking Corporation (HSBC). Some of their objectives are to meet customers FX needs, manage the banks overall FX position, and produce profit for the bank.

Businesses can be broadly categorized into two categories: financial firms and non-financial firms. Financial firms (e.g. Morgan Stanley and Fidelity Investment) help individuals, institutions, and other non-financial firms (e.g., Coca-Cola, Honda) to meet their FX needs. Their activities include trade finance, hedging, equity/mutual funds/unit trust investments, interest/dividend remittances, and speculation. On the other hand, non-financial firms activities include international trade, foreign direct investments and hedging. International investing by businesses has had an enormous impact on the FX market by increasing demand for currencies and changing investment practices and methods.

Individuals have varied and sometimes very specific FX needs. For this reason, it is imperative that Relationship Managers (RMs) are knowledgeable about the objectives of their customers. Their activities include foreign currency transactions for obligations or remittances, foreign currency investments, portfolio diversification, and speculation in the FX market. Individuals form the target market for Global Consumer Bank (GCB)s FX products.INTERBANKS MARKET RATES AND TRANSACTIONS Interbanks market rates and retail customer rates will differ. This is because the customer rates will include the banks markup or markdown. Take for example the buying and selling of US dollars (USD) and Japanese Yen (JPY): Say the Interbanks market was quoting:

Bank buys USD 1 for JPY 110.00 Bank sells USD 1 for JPY 110.10 Given these Interbanks market rates, the bank may quote the following to the retail customer: Bank buys USD 1 for JPY 110.00 - 0.10 = JPY 109.90 (markdown)

Bank sells USD 1 for JPY 110.10 + 0.05 = JPY 110.15 (markup) This is just an example to illustrate the point. As you progress through this Unit, you will find the markup and markdown will depend on how the currency pairs are expressed. This will be covered in the Mechanics of FX section Interbank market transactions involve several components: Banks and brokers transact via telephone, telex, Reuters, and electronic brokering. Settlement is handled through correspondent accounts using transfer and clearance systems. SWIFT (Society for Worldwide International Financial Telecommunications) is a system for transferring funds. CHIPS (Clearinghouse Interbank Payment Systems) is a system for clearing funds. The actual transaction process varies by country depending on the size of the bank and level of sophistication of its systems as well as that of the country. THE MECHANICS OF FOREIGN EXCHANGE RATE QUOTATIONCOMMODITY CURRENCY AND TERM CURRENCY There are two currencies in every FX quote. Here is an example: If a customer wants to buy USD for YEN from a bank, the bank may quote the customer: USD/JPY = 110.00 what this means it that the customer has to pay the bank JPY 110.00 in exchange for US$1.00. In this example, the USD is what is called the base currency or the commodity currency. It is the unit currency and the currency being priced. It is always represented first in a quote. In this example, the JPY is what is called the term currency. It is the non-one-unit currency. It is the price of the commodity currency. It is always represented second in a quote. The Oblique symbol (e.g. USD/FCY) does not mean USD divide by FCY or USD per FCY. It means the number Foreign Currency (FCY) per one dollar.

FX Rate Quotation Terms Direct and Indirect Terms

There are two different ways FX rates are quoted. One method is refereed to as the American (Direct) System; the other is the European (Indirect) System. European (Indirect) Term is the number of foreign currency per unit of US dollar. For example:

USD/JPY USD/CHF American (Direct) Term is the number of US dollars per unit of base currency. For example:

EUR/USD AUD/USD Choosing a system depends on the terms of reference one requires. Both terms express the same relationship but from different perspectives.FX RATE QUOTATIONS American = Direct Quotes apply to the following currencies:

Sterling Pound (Cable) Australian $ (Aussie) New Zealand $ (Kiwi) Euro (EUR) European = Indirect Quotes apply to the following currencies:

Japanese Yen (Yen) Swiss Franc (Swissy) Canadian $ (Candy)BID AND OFFER HOW TO READ AN FX QUOTE A FX quote is made when two parties enter into a transaction for the exchange of two currencies. One party is buying currency A and selling currency B. The second party is selling currency A and buying currency B. The bid rate is the quoting partys buying price of the commodity currency, and the offer rate is the quoting partys selling price of the commodity currency. Example: Say the Interbank rates were: USD/JPY 105.40(bid)/44(offer). The bank, based on its interbank trades will markup or markdown the interbank rates and quotes a bid/offer rate to the customer The bank will quote bid or offer rates depending on whether the customer buys or sells. Usually, the larger the customers request, the better the quote will be. For example: USD 1 = CAD$ 1.3720/25. The bank sells (offer) USD 1 for CAD$ 1.3725 (=1.3700+0.0025) The bank buys (bid) USD 1 for CAD$1.3720 The lower number represents the bid, i.e. the rate at which the bank will buy (bid) USD and sell CAD. The higher number represents the offer, i.e. the rate at which the bank will sell (offer) USD and buy CAD. The figure 25 is 0.0025. Thus the offer is 1.3700+0.0025 = 1.3725. Often, a bid/offer quote is also written with an oblique (/), i.e.1.3720/25. Please note that in the case of 1.3798/03, the offer is NOT 1.3700+0.0003. It is 1.3800+0.0003. The quality of a bid and offer quote or a quote can be judged upon several criteria. A fast reply usually indicates a high volume, experienced commercial bank that is able to be a market maker. A narrow spread implies a more stable currency. Reasonable or large amounts tend to receive better quotes because the trade volume is high.THE EURO WHAT IS THIS CURRENCY?

In the earlier section, reference was made to a currency called the euro. The following is a brief description of this currency and its mechanics. On January 1, 1999, this currency was introduced as a single European currency. The economic rationale is that the euro may strengthen the single European market. From January 1, 1999 to January 1, 2002, no one is forced to use the euro or prohibited from using it. Customers account balance in European Currency Unit (ECU) has been replaced by euro on a 1:1 basis on January 1, 1999. By January 1, 2002, national currencies (NCD) such as Deutschmark, French Franc, etc. will migrate to a euro account.WHICH CURRENCIES ARE INVOLVED?There are 11 participating Member States. They are:

1. German Deutschmark (DEM)

2. Austrian Schilling (ATS)

3. Netherlands Guilder (NLG)

4. French Franc (FRF)

5. Italian Lira (ILT)

6. Spanish Peseta (ESP)

7. Belgium Franc (BEF)

8. Finnish Marka (FIM)

9. Luxembourg Franc (LUF)

10. Irish Punt (IEP)

11. Portuguese Escudo (PTE)

12. Swedish Mark THE MECHANICS OF FOREIGN EXCHANGE CROSS RATES

CROSS RATES A Cross rate is a FX rate of two currencies derived via a third currency. Usually the intermediate currency is the USD. Cross rates depend on the perspective of the currency holder and his/her desire trade. Cross rate between two currencies can differ depending on which currency is being bought and which is being sold. Cross Rate tables are often published on a daily basis. An example of which can be found in The Asian Wall Street Journal. The commodity or base currency is the one unit of currency; the term currency is the non-unit currency. An example is AUD/JPY 65.49. The AUD 1 is the commodity or base currency; the JPY 65.49 is the term currency. The most important part is to determine which bid rate and which offer rate to use. Here is an example using the AUD/JPY example. How was the AUD/JPY derived? The AUD/JPY quote can be split into two quotes: AUD/USD and USD/JPY First, sell AUD to buy USD and then sell USD to buy JPY. Here, AUD is the base currency and is traded to buy USD, the correct quote to use is the offer rate. Then the bid rate is used because the USD is traded to buy the term currency of JPY. Hence, in determining which bid and offer to use, you must bear in mind whether the currencies use the direct or indirect quote. For example, when calculating CHF/JPY, the quote can be split into: USD/CHF and USD/JPY You will see this more clearly in the examples in the Chain Rule section. The Chain Rule is a standard formula used to derive any cross rate.THE MECHANICS OF FOREIGN EXCHANGE FORWARD RATESSPREADS: BUSINESS SPREADS AND BID/OFFER SPREADS Note that there are two different spreads. It is important to understand the distinction between them in order to calculate the correct profit margin from a transaction. Market bid/offer spread is the difference between the bid and offer rate as quoted in the interbank market. The business spread is the markup or markdown which the bank charges the customer. It is the profit margin made from a FX transaction.DETERMINING BID/OFFER SPREAD Wide spreads usually signify risk because they result from trading in soft currencies whose markets tend to be volatile and illiquid. A wide spread may also be due to a small degree of market competition. On the other hand, narrow spreads represent relatively stable currencies, whose markets tend to be liquid. The greater the market competition, the narrower the spread. Size and experience of the commercial bank greatly influence the spread.TOTAL RETURN CONCEPT Currency time deposits are the most common form of FX investment. From which the bank will earn a FCY deposit spread. This is the difference between the interest rate assumed by the bank and the interest rate charged by the bank to the customer. So if a customer makes a foreign currency time deposit, what is the return for the bank and the customer? From the customer and the banks standpoint, their total return is as follows: Customer Standpoint:

Total Return = Currency Appreciation/Depreciation + FCY Deposit Interest Return Bank Standpoint:

Total Spread = FX Spread (Markup / Markdown) + FCY Deposit SpreadTIME ELEMENT IN FX QUOTES A SPOT transaction is a transaction which settles in two business days. This accounts for two-thirds of all FX transactions. A Forward transaction contract is for a FX transaction at a future date at a rate determined at the time the contract is entered. Settlement can range from the spot date up to five years. Various forward rates exist depending on the time frame (i.e., 30-day, 90-day, 180-day). The forward transaction can be used to lock in FX gains, protect against future adverse FX movements, and eliminate exchange rate uncertainty.FORWARD RATES The forward price for a unit of foreign currency may be at par with the spot price (the same), but usually it is either at a premium (higher than the spot rate) or at a discount (lower than the spot rate). The exchange differential reflects whether the forward rate is at a premium or at a discount, and what the price difference is for delivery on a specified future date. This differential is called the SWAP rate or SWAP points. If the SWAP bid appears to be higher than the SWAP offer, the commodity currency trades at a discount against the term currency. To find the forward

Bid and offer, subtract the SWAP bid from the SPOT bid and the SWAP offer from the SPOT offer. The reverse is true if the SWAP bid is lower than the SWAP offer. Hence, you will add the SWAP bid and offer to the SPOT bid and offer.INTEREST DIFFERENTIAL Interest rate differential and the length of time between the Spot and forward transaction are the main two factors which determine the SWAP rate.

THE DRIVERS OF FOREIGN EXCHANGE

FACTORS AFFECTING EXCHANGE RATES The FX market is one of the more volatile financial markets. Understanding and predicting the factors that affect FX rate is a valuable but difficult skill to obtain. The key is in understanding the fundamental forces that drive these factors in todays world.

FX SUPPLY AND DEMAND The forces that drive FX rate fluctuations are the changes in the supply and demand of currencies. Moving away from the equilibrium FX rate creates pressure on the currency to return to that rate. This pressure results in an appreciation or a depreciation of a currency. Supply of FCY comes from exports and capital inflow. Demand of FCY comes from imports and capital outflow. Supply and demand of a nations currency are captured in a national account called the balance of payments (BOP). The BOP consists of the current account and the capital account. The current account covers the imports and exports of goods and services while the capital account covers the movement of investments or capital inflows and outflows. The capital account refers to both short-term and long-term capital flows and foreign direct investments. The components in the current account (i.e. imports and exports, imports) and the capital account (i.e. investments) are the dynamic forces which drive FX rate movement. In addition, market expectations and central bank initiatives are also key determinants of FX supply and demand.BALANCE OF PAYMENTS (BOP) The Balance of Payment consists of the Current Account and the Capital Account.

BOP = Current Account + Capital Account

Current Account = Exports Imports of Goods & Services

Capital Account = Foreign Domestic Investment Domestic Investment Abroad.BALANCE OF PAYMENTS: CURRENT ACCOUNT A current account surplus signals that a countrys exports are greater than its imports. A surplus results in excess demand for domestic currency. Other things being equal, the domestic currency will most likely undergo an appreciation. A current account deficit signals that a countrys exports are less than its imports. A deficit results in excess supply for domestic currency. Other things being equal, the domestic currency will most likely undergo depreciation. Remember that all factors must be seen from a relative perspective because it is the performance of one country compared with the performance of another. Consider the scenario where there is relatively more income growth in country A than B. An increase in Country As growth rate means residents of Country A may purchase more imports from Country B. If more imports are needed by Country A, then its current account will decrease, and Currency B will be demanded by Country A to pay for the imports. As a result, Country As currency can depreciate relative to Country Bs currency.MARKET EXPECTATIONS Expectations can change rapidly depending on market psychology. Analyzing the effect of expectations requires a feel for the market. Expectations capture the unpredictability of the FX market because there can be more than one possible outcome for a single expectation.

MARKET SENTIMENT Market sentiment can run the gamut from being bearish to neutral to bullish. Below are examples: Consol dative: Market pauses normally after a big move before expecting further movement. Neutral: Lack of direction; lack of interest or view on part of players Volatile: Violent movements in market prices Range Trading: Market trades within a band; whenever there is no significant news or interest. Bullish: Market expects prices to rise. Bearish: Market expects prices to fall.CENTRAL BANK INTERVENTION There are various reasons for central bank interventions including currency stabilization (reduced fluctuations), maintaining FX rate policies, and to meet economic policy objectives. Each central bank has a distinct character, i.e., policy orientation. To understand a central bank you must be knowledgeable about the macroeconomic environment in which it exists. Central bank actions and policies are based on the performance of key economic indicatorsDIRECT CENTRAL BANK INTERVENTION Central banks can directly intervene in the FX market by buying and selling currencies in order to manage a rate. This will lead to an appreciation or depreciation of FX rate. The impact that central banks can have over a sustained period is limited with direct intervention.INDIRECT CENTRAL BANK INTERVENTION Central banks play a key role in affecting short-term interest rates which in turn affect the FX rate. The central bank is then making an indirect intervention to affect FX rates. For example, Open-market operations are activities carried out by the Federal Reserve Bank based upon instructions from the Federal Open Market Committee (FOMC) of New York. These activities are designed to regulate the money supply. The operations are important tools because they affect the federal funds rate. Short-term interest rates are priced off the federal funds rates. Short-term interest rates affect the FX rate because they affect investment decisions and forward rates.FLOATING FX RATE SYSTEM This is when market forces determine the FX rates. The advantages and disadvantages of this include the following:

ADVANTAGES DISADVANTAGES1. Automatic adjustment if there is a 1. Speculation leading to market destabilization. trade deficit

2. Flexible to use other policy measures 2. Uncertain exchange rates may discourage

international trade

3. Creates liquidity FIXED FX RATE SYSTEM This is where the FX rates are determined by government decisions, not market conditions. The central bank maintains the external value of the currency by buying or selling.

ADVANTAGES DISADVANTAGES1. Currency certainty

1. Delays in adjustment process

2. Adjustments may be more costly

than the floating systemCENTRAL BANK POLICY

The central bank seeks to impact their currencies primarily by three ways: Controlling the money supply Controlling interest rates Intervening directly in the market Tightening money supply, increasing short-term interest rates and actively intervening to support the currency causes the currency to gain strength. Loose monetary policy, cutting short-term interest rates and active intervention to devalue a currency causes the currency to weaken. The first two ways are indirect attempts to influence the exchange rate. The third (direct intervention) has both a direct and indirect effect. Buying or selling a currency directly affects the supply and demand of the currency. Indirectly the central banks actions send a message to the market about the intentions of the central bank to support or devalue a currency. POLITICAL NEWS Political news can have an equally big impact on the strength or weakness of a currency. Two types of political news influence exchange rate fluctuations: Confidence in political leadership Stability of the region Increase in confidence in political leadership and more stable regional situations can lead to strengthening of the domestic currency. Whereas loss of confidence in the political leadership and destabilized regional situation can cause the domestic currency to weaken.FOREX VS. EQUITY If you are interested in trading currencies online, you will find that the Forex market offers several advantages over equities trading.

24-HOUR TRADING

Forex is a true 24-hour market, which offers a major advantage over equities trading. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours earning reports or analyst conference calls.

After hours trading for U.S. equities brings with it several limitations. ECN's (Electronic Communication Networks), also called matching systems, exist to bring together buyers and sellers - when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, traders must wait until the market opens the following day in order to receive a tighter spread.

SUPERIOR LIQUIDITY With a daily trading volume that is 50x larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.

Because of the lower trade volume, investors in the stock market are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.100:1 LEVERAGE 100:1 leverage is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by equity brokers. At 100:1, traders post $1000 margin for a $100,000 position, or 1%. While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day. The most effective way to manage the risk associated with margined trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a system where your controls kick in when emotion might otherwise take over.LOWER TRANSACTION COSTS

It is much more cost-efficient to trade Forex in terms of both commissions and transaction fees. FOREX.com charges NO commissions or fees whatsoever, while still offering traders access to all relevant market information and trading tools. In contrast, commissions for stock trades range from $7.95-$29.95 per trade with online discount brokers up to $100 or more per trade with full service brokers. Another important point to consider is the width of the bid/ask spread. Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip is .0001 US cents) in the major currencies. In general, the width of the spread in a forex transaction is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide spread.

PROFIT POTENTIAL IN BOTH RISING AND FALLING MARKETS

In every open FX position, an investor is long in one currency and shorts the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling market. The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Up tick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale.

FOREX VS. FUTURES The global foreign exchange market is the largest, most active market in the world. Trading in the forex markets takes place nearly round the clock with $1.9 trillion changing hands every day. It is the main event. The benefits of forex over currency futures trading are considerable. The dissimilarities between the two instruments range from philosophical realities such as the history of each, their target audience, and their relevance in the modern forex markets, to more tangible issues such as transactions fees, margin requirements, access to liquidity, ease of use and the technical and educational support offered by providers of each service. These differences are outlined below:

More Volume = Better Liquidity. Daily currency futures volume on the CME is just over 2% of the volume seen every day in the forex markets. Incomparable liquidity is one of many advantages that forex markets hold over currency futures. Truth be told, this is old news. Any currency professional can tell you that cash has been king since the dawn of the modern currency markets in the early 1970's. The real news is that individual traders from every risk profile now have full access to the opportunities available in the forex markets. Forex markets offer tighter bid to offer spreads than currency futures markets. By inverting the futures price to compare it to cash, you can readily see that in the USD/CHF example above, inverting the futures dealing price of .5894 - .5897 results in a cash price of 1.6958 - 1.6966, 8 pips vs. the 5-pip spread available in the cash markets. Forex markets offer higher leverage and lower margin rates than those found in currency futures trading. When trading currency futures, traders have one margin rate for "day" trades and another for "overnight" positions. These margin rates can vary depending on transaction size. When trading cash markets, you have access to the same margin rates day and night. Forex markets utilize easily understood and universally used terms and price quotes. Currency futures quotes are inversions of the cash price. For example, if the cash price for USD/CHF is 1.7100/1.7105, the futures equivalent is .5894/ .5897; a methodology followed only in the confines of futures trading.

Currency futures prices have the added complication of including a forward forex component that takes into account a time factor, interest rates and the interest differentials between various currencies. The forex markets require no such adjustments, mathematical manipulation or consideration for the interest rate component of futures contracts. Forex trades executed through FOREX.com are commission free. Currency futures have the added baggage of trading commissions, exchange fees and clearing fees. These fees can add up quickly and seriously eat into a trader's profits.

In contrast, currency futures are a small part of a much larger market; one that has undergone historical changes over the last decade. Currency futures contracts (called IMM contracts or international monetary market futures) were created at the Chicago Mercantile Exchange in 1972. These contracts were created for the market professionals, who at that time, accounted for 99% of the volume generated in the currency markets. While some intrepid individuals did speculate in currency futures, highly trained specialists dominated the pits. Rather than becoming a hub for global currency transactions, currency futures became more of a sideshow (relative to the cash markets) for hedgers and arbitragers on the prowl for small, momentary anomalies between cash and futures currency prices. In what appears to be a permanent rather than cyclical change, fewer and fewer of these arbitrage windows are opening these days. And, when they do, they are immediately slammed shut by a swarm of professional dealers. These changes have significantly reduced the number of currency futures professionals, closed the window further on forex vs. futures arbitrage opportunities and so far, have paved the way to more orderly markets. And while a more level playing field is poison to the P&L of a currency futures trader, it's been the pathway out of the maze for individuals trading in the forex markets.

TYPES OF FOREIGN EXCHANGE MARKET AUTHORIZED DEALERS

49 FULL FLEDGE MONEY CHANGERS

50 RESTRICTED AUTHORIZED DEALERS

56TYPES OF FOREX MARKETINDIAN FOREX MARKET RESERVE BANK OF INDIA

Authorized Full Fledged Restricted Restricted Dealers Money Money Authorized Changers Changers Dealers

Authorized to sell foreign exchange to: 1. Exporters

1. Travelers Discontinued Recently introduce 2. Importers 2. Foreign Tourists after 31st License yet to be 3. Non-residents 3. Business Travelers December issued by RBI 4. NRIs

(Purchase & Sale)2004

AUTHORIZED DEALER There are 84 Commercial Banks and 1 State Co-operative Bank and 2 Urban Co-operative this all are permissible current and capital account transaction. Authorized Dealers major activities are to buy and sell foreign exchanges apart from this they are given rights to issue demand draft which FFMCs are not getting. The company which fulfill the below criteria get eligibility for Authorized Dealers.Sl. No. Category of license (Number) Entities Eligibility Major Activities

1 Authorized DealersCommercial Banks,

State Co-op Bank,

Urban Co-op Banks No Change

1) License to conduct Banking business in India.

2) Report from the concerned regulatory department of RBI. All current and capital account transactions according to RBI directions issued from time-to-time.

FULL FLEDGE MONEY CHANGER (FFMCs).

Payment for Foreign Exchange sold to public exceeding Rs.50, 000/- should be received by crossed Cheque only.

FFMC should not hold huge idle balances in Foreign Currency. All transactions with other FFMCs / Ads should be settled in account payee Cheque only.

If written off any foreign currency exceeding US $ 2000 in calendar year RBI permission must require.

RBI GUDELINES ON FOREX BUSINESS

Memorandum instructions (FLM) issued to FFMC (Full Fledge Money Changers) by RBI under Section 73(3) of Foreign Exchange Regulations Act, 1973 (46 of 1973).

As per the FLM, FFMCs are required to maintain following forms.

FLM 1 (daily summary and Balance Book)

FLM 2 (daily currency wise summary and Balance Book)

FLM 3 (register of FOREX purchased from public)

FLM 4 (register of FOREX purchased from Ads/Authorized money changers)

FLM 5 (register of sales of FOREX to public)

FLM 6 (register of sales of FOREX to Ads/ Authorized Moneychangers)

FLM 7 (Register of TCs surrendered to Ads/Authorized Moneychangers)

FLM 8 (summary statement of purchases and sales of foreign currency notes during the month)-TO BE SUBMITTED TO RBI EVERY MONTH.

FLM-8: Monthly consolidates statements for all its offices in form FLM-8 so as to reach Reserve Bank not later than 10th of the succeeding/next month. FFMC, should submit to the Reserve Bank a monthly statement including details of Receipt/Purchase of US $ 10,000/- or equivalent and above per transactions within 10 days of the close of the previous month. FFMCs should include transactions of their franchisees in the statement.

CONCURRENT AUDIT REPORT

MONTHLY AUDIT: Single Branch FFMCs having turn over of more than US $ 1, 00,000 or equivalent and multiple Branch FFMCs. QUARTERLY AUDIT: Single Branch having turnover of less than US $ 1 lac or equivalent. FFMCs should submit a statement certifying that the Concurrent Audit and the Internal Control Systems are working satisfactorily. Specimen signature of Authorized officials every year. Written off statement: Written off any currency up to US $ 2000 in a calendar year should be submitted to Reserve Bank in April every year.

DOCUMENTS FOR RENEWAL OF FFMC LICENCE

FFMC LICENCE RENEWAL DOCUMENTS:

1. A copy of the latest audited balance sheet with a Chartered Accountants certificate for net owned Funds as on date.)

2. C.R. Form Bankers in a sealed cover.

3. A declaration to the effect that no proceedings have initiated by the ED/DRI and no criminal cases are pending against the agency.

4. List of Authorized Signatories.

5. Original License issued earlier.

6. Certificate issued under Shops & Establishment Act.

7. Provisional Balance Sheet as on date..

N.B.: All documents should be submitted before one month.

FFMC DOCUMENTS FOR BRANCH / ADDITIONAL LOCATION1. Net owned Funds Rs.50 lakhs.

2. A copy of the latest audited balance sheet with a Chartered Accountants certificate for net owned Funds as on date)

3. C.R. Form Bankers in a sealed cover.

4. A declaration to the effect that no proceedings have initiated by the ED / DRI and no criminal cases are pending against the agency.

5. List of Authorized Signatories.

6. Original License issued earlier.

7. Certificate issued under Shops & Establishment Act.

8. Provisional Balance Sheet as on date..

DOCUMENTS REQUIRED FOR FRANCHISEESHIP BY FFMC

1. Form RMC F.

2. Franchisee agreement between both the parties.

3. Application by franchisee on their letterhead for their willingness to work as franchisee under the name of FFMC.

4. Copy of Certificate issued under Shops & Establishment Act in the name of Franchisee.

5. Undertaking by the directors of FFMC to take due diligence while selecting franchisee.

6. Undertaking by the directors of FFMC to comply with all the provisions of the Franchising Agreement / Prevailing RBI regulations regarding money changing.

7. Undertaking by the franchisee for reporting of transactions on monthly basis to their franchisor and for inspection once in a year. This condition also include in Franchisee ship Agreement

8. Undertaking for surrender of foreign exchange to the FFMC by the proposed franchisee within 7 days from the date of its purpose.

Note:(1) Franchisee can be given only for RMC business.

(2) FFMC cannot be appointed as franchisee under other FFMC.

Validity of the Agreement should not exceed the validity of the FFMC Licensee.

RESTRICTED AUTHORIZED DEALERS (RAD)NEW CASES OF RESTRICTED AD

RBI is considering liberalizing in licensing policy Well functioning FFMCs with strong financials that demonstrate good governance with minimum net owned funds of Rs. 10 crores may be considered for Restricted ADs license. The Following Current Account Transactions & Prohibits

Schedule-I Remittance out of Lottery

[Rule.3]

Example: Winning

Schedule-II

Require Prior Approval of Ministry, Govt. of India

[Rule.4] Example: Cultural Tours.

Schedule-III

Require Prior Approval of RBI

[Rule.5]

Example: Private Visits

-

Exceeding US $ 10,000 Some of the Ceilings Pertaining to Miscellaneous Remittances:

US Dollars

1. Travel Quota 10,000

2. Business Travel 25,000

3. Donations 5,000

4. Gifts 5,000

5. Employments 1,00,000

6. Emigration 1,00,000

7. Maintenance of Close

Relative 1,00,000

RBI GUIDELINES CURRENT RBI GUIDELINES

58 LATEST RBI GUIDELINES

62(A) CURRENT RBI GUIDELINES

RBI GUIDELINES ON FOREX BUSINESS BUYING OF FOREIGN CURRENCY RBI GUIDELINES ON FOREX BUSINESS SELLING OF FOREIGN CURRENCY RBI GUIDELINES OF FOREX BUSINESS CASH MEMO

RBI GUIDELINES ON FOREX BUSINESS - BUYING Buying of Foreign Currency from public As per FLM instructions Ads/FFMCs can freely purchase foreign currently up to USD10000 and beyond that CDF (currency declaration form) should be verified. On purchase of FOREX from any person, FFMC is required to issue ENCASHMENT CERTIFICATE in prescribed format. As per rule 6DD (m) of I.T. Act, cash transaction cap of Rs.20000/- dose not apply to FOREX purchase transaction by any AD/FFMC. FFMCs can freely purchase FOREX from any other AD/FFMC but payment of the same should be made only by way of crossed Cheque/draft.RBI GUIDELINES ON FOREX BUSINESS - SELLING Selling of Foreign Exchange

AD/FFMC can sell FOREX to general public as per following limits:

Sale against Basic Travel Quota (BTQ)

Travelers proceeding to Bangladesh, Bhutan & NEPAL-not exceeding USD50.

Travelers proceeding to other countries- (maximum USD10000( currency maximum USD2000 balance compulsorily by way of TC)

Sale against Business Visits (LERMS)

FOREX can be released against business visits sponsored by firms/organizations/companies maximum USD25000 per trip (currency maximum USD2000 balance compulsorily by way of TC)

HOWEVER, ENTIRE FOREX LIMIT CAN BE AVAILED BY WAY OF TRAVELLERS CHEQUE FOR ANY TYPE OF ABROAD VISIT

Documents required for release of FOREX

Valid Passport, Visa and confirmed Air Ticket- for BTQ release

LERMS Letter of Co.s letter head as per prescribed format.

RBI GUIDELINES OF FOREX BUSINESS CASH MEMO CASH MEMO

Money changers are required issue a Cash Memo on their letter head against each sale of FOREX. Each cash memo should be serially numbered and prepared in duplicate.

Rates of exchange are to be displayed at a prominent place at the business place of AD/FFMC.

Inspection of transaction by RBI

Any office authorized by RBI can any time inspect books of accounts of AD/FFMC.

Renewal of License FFMC should apply for renewal of license at least 3 months in advance of the expiry of current license.

Submission of statement to RBI

Money changers should submit their FLM 8 to the office of RBI not later than 10th of succeeding month along with supporting documents.

(B) LATEST RBI GUIDELINES ANTI-MONEY LAUNDERING GUIDELINES FOR AUTHORIZED MONEY CHANGER

LICENSING POLICY FOR AUTHORIZED PERSONS: LIBERALIZATIONS

ANTI-MONEY LAUNDERING GUIDELINES FOR AUTHORIZED MONEY CHANGER1. MONEY LAUNDERING The offence of money laundering has been defined in section 3 of the Prevention of money laundering Act, 2002 (PMLA) as whosoever directly or indirectly attempts to indulge of knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money-laundering. In common mans language, money laundering can be called a process by which money or other assets obtained as proceeds of crime are exchanged for clean money or other assets with no obvious link to their criminal origins.2. ANTI-MONEY LAUNDERING GUIDELINES The purpose of prescribing Anti-Money Laundering Guidelines is to prevent the system of Authorized Money Changers (AMCs) engaged in the purchase and / or sale of foreign currency notes/Travelers cheques from being used for money laundering. Therefore, Anti-Money Laundering (AML) measures should include. a. Identification of Customer according to Know Your Customer norms,

b. Recognition, handling and disclosure of suspicious transactions,c. Appointment of Money Laundering Reporting Officer (MLRO),

d. Staff Training,e. Maintenance of records,

f. Audit of transactions.

The following paragraphs contain broad guidelines to enable AMCs to formulate and put in place a proper policy framework for AML measures.

3. KNOW YOUR CUSTOMER (KYC) IDENTIFICATION OF CUSTOMERS All transactions should be undertaken only after proper identification of the customer. Photocopies of proof of identification should invariably be retained by the AMC after verifying the document in original. Full details of the and address as well as the details of the identity document provided should also be kept on record.

If a transaction is being undertaken on behalf of another person, identification evidence of all the persons concerned should be obtained and kept on record. 4. PURCHASE OF FOREIGN EXCHANGEa) For encashment of foreign currency notes and/or Travelers Cheques up to USD 500 or its equivalent, production of passport need not be insisted upon and any other suitable document of identification like ration card, driving license etc. can also be accepted.b) For verification of the identity of customer for encashment in excess of USD 500 or its equivalent, a photo identity document such as passport, driving license, PAN card, voter identity card issued by the Election Commission, etc. should be obtained.c) Requests for payment of sale proceeds in cash may be acceded to the extent of USD 1000 or its equivalent per transaction. All encashment within one month may be treated as single transaction for the purpose. In all other cases AMCs should make payment by way of Account Payee cheque / demand draft only.

d) Where the amount of forex tendered for encashment by a non-resident or a person returning from abroad exceeds the limits prescribed for Currency Declaration Form (CDF), the AMC should invariably insist for production of declaration in CDF.5. IN ALL CASES OF SALE OF FOREIGN EXCHANGE, IRRESPECTIVE OF THE AMOUNT INVOLVED,

For identification purpose the passport of the customer should be insisted upon. The sale of forex should be made only on personal application and identification. Payment in excess of Rs.50, 000/- towards sale of foreign exchange should be received only by account payee cheque / demand draft.

All purchases by a person within one month may be treated as single transaction for the purpose. Encashment Certificate, wherever required, should also be insisted upon.6. ESTABLISHMENT OF BUSINESS RELATIONSHIP Relationship with a business entity like a company / firm should be established only after obtaining and verifying suitable documents in support of name, address and business activity such as certificate of incorporation under the Companies Act, 1956, MOA and AOA, registration certificate of a firm (if registered), partnership deed, etc. A list of employees who would be authorized to transact on behalf of the company / firm and documents of their identification together with their signatures, should also be called for. Copies of all documents called for verification should be kept on record.7. SUSPICIOUS TRANSACTIONS The AMC must ensure that its staff is vigilant against money laundering transactions at all times. An important part of the AML measures is determining whether a transaction is suspicious or not. A transaction may be of suspicious nature irrespective of the amount involved. Some possible suspicious activity indicators are given below. Customer is reluctant to provide details/documents on frivolous grounds.

The transactions is undertaken by one or more intermediaries to protect the identity of the beneficiary or hidden their involvement.

Large cash transactions.

Size and frequency of transactions is high considering the normal business of the customer.

Change in the pattern of business transacted.

The above list is only indicative and non exhaustive.

8. APPOINTMENT OF MONEY LAUNDERING REPORTING OFFICER (MLRO) An MLRO may be appointed by every AMC for monitoring transactions and ensuring compliance with the AML Guidelines issued by the Reserve Bank from time to time. The MLRO will also be responsible or reporting of suspicious transaction/s to the Financial Intelligence Unit (FIU). Any suspicious transaction/s, if undertaken, should have prior approval of MLRO. The MLRO shall have reasonable access to all the necessary information/ documents, which would help him in effective discharge of his responsibilities. The responsibility of the MLRO may include: Putting in place necessary controls for detection of suspicious transactions.

Receiving disclosures related to suspicious transactions from the staff or otherwise.

Deciding whether a transaction should be reported to the appropriate authorities.

Training of staff and preparing detailed guidelines/handbook for detection of suspicious transactions. Preparing annual reports on the adequacy or otherwise of systems and procedures in place to prevent money laundering and submit it to the Top Management within 3 months of the end of the financial year.

9. REPORTING OF SUSPICIOUS ACTIVITY To the extent possible, all suspicious transactions should be reported to the MLRO before they are undertaken. Full details of all suspicious transactions, whether put through or not, should be reported, in writing, to the MLRO. Any transaction which seems suspicious may be undertaken only with prior approval of MLRO. If the MLRO is reasonably satisfied that the suspicious transaction has/may have resulted in money laundering he should make a report to the appropriate authority viz. the FIU.10. STAFF TRAINING All the managers and staff of the AMC must be trained to be aware of the policies and procedures relating to prevention of money laundering, provisions of the PMLA and the need to monitor all transactions to ensure that no suspicious activity is being undertaken under the guise of money changing. The steps to be taken when the staff come across any suspicious transactions (such as asking questions about the source of funds, checking the identification documents carefully, reporting immediately to the MLRO, etc) should be carefully formulated by the AMC and suitable procedure laid down. The AMCs should have an ongoing training programmed for consistent implementation of the AML measure.11. AUDIT/COMPLIANCE The concurrent auditor should check all transaction to verify that they have been done in compliance with the anti-money laundering guidelines and have been reported as required. Compliance on the lapses, if any, recorded by the concurrent auditor should be put up to the Board. A certificate from the Statutory Auditor on the compliance with AML guidelines should be obtained at the time of preparation of the Annual Report and kept on record.12. MAINTENANCE OF RECORDS The following documents should be preserved for a minimum period of five years. Records including identification obtained in respect of all transactions. Statements/Registers prescribed by the Reserve Bank from time to time. All Inspection/Audit/Concurrent Audit Reports. Annual reports of the MLRO submitted to the Top Management in terms of paragraph 8 above. Details of all suspicious transactions reported in writing or otherwise to the MLRO. Details of all transactions involving purchase of foreign exchange against payment in cash exceeding Indian Rupees 10,00,000 from inter-related persons during one month. All correspondence/reports with the appropriate authority in connection with suspicious transactions. References from Law Enforcement Authorities, including FIU, should be preserved until the cases are adjudicated and closed.LICENSING POLICY FOR AUTHORIZED PERSONS: LIBERALIZATIONS Foreign Exchange Management Act (FEMA) stipulates that all foreign exchange transactions are required to be routed only through the entities that are licensed by the Reserve Bank to undertake such transactions. Such entities are defined as Authorized persons in Section 10 of the Act. Under current dispensation, such authorized person may be:

a. A Commercial bank (AD), or

b. A Money changer (FFMC), or

c. Any financial institution authorized for limited kind of transactions, depending on their activity, or

d. Any other entity authorized by the Reserve Bank.

ENHANCED ACCESS TO COMMON PERSON With the progressive liberalization in foreign exchange related transactions common person can now undertake variety of current account transactions without approaching the Reserve Bank. A large segment of population is increasingly getting connected with forex transactions of an expanding nature on individual accounts. Taking into account the day-to- day needs of (a) common persons for undertaking various transactions, (b) tourists for better encashment services and (c) requests received from existing FFMCs there is a felt need for widening and rationalizing the intermediate tier of authorized persons which is licensed to undertake foreign exchange transactions to meet the day-to-day needs. These would cater to tourists for encashment and common persons for release of foreign exchange for medical treatment, education, employment, travel related transactions and in general a large variety of current account transactions that are not trade transactions

Therefore, with a view to liberalizing and rationalizing the scope of activities currently undertaken by the authorized persons an internal Group consisting of Shri H. Bhattacharya, CGM-I-C, DEIO, Shri G. Padmanabhan, CGM-I-C, DIT and Shri Vinay Baijal, CGM, FED was constituted to study the related issues and make recommendations keeping in view the need for enhanced as well as wider access and accompanying safeguards, especially reporting requirements.

The observations and recommendations of the Group are detailed in following paragraphs.

LEGAL FRAME WORK Section 10 (1) of FEMA enables Reserve Bank to authorized any person to be known as Authorized Person (AP), to deal in foreign exchange or foreign securities, as an Authorized Dealer (AD), Money Changer (MC) or Offshore Banking Unit (OBU) or in any other manner as it deems fit. The Bank has therefore wide discretion to authorize a person as AD or MC or OBU or in any other manner, and all such persons would be known as 'authorized person.' Within the broad categories of AD or MC or OBU, it may be permissible to have sub-categories. There should however be clear eligibility norms for the classification and the norms should have nexus with the object of classification. The authorization is subject to the conditions laid down therein. The conditions may be for the purpose of ensuring continued eligibility for conducting the authorized business, and/or relatable to the conduct of business. While there may be standard conditions uniformly applicable to all APs or applicable to APs in a category/sub-category, there may also be special conditions applicable in a particular case on the facts thereof.

EXISTING ARRANGEMENT The Reserve Bank has currently authorized 976 entities as authorized persons in following categories: Category of license ( Number) Entities Major Activities

Authorized Dealers

(87) Commercial Banks - 84;

State Co-operative Bank - 1;

Urban Co-operative Bank - 2. All permissible current and capital account transactions

Financial Institutions

(9) Financial Institutions 4

(EXIM, IFCI, SIDBI ,CCIL)

Factoring Agencies 5 Activities related to financing of international trade undertaken by these institutions

Full Fledged Money Changers

(879) Department of Post

Urban Cooperative Bank 9

Other FFMCs 869 Sale/Purchase of foreign exchange for private and business visits abroad

Others

(1) Thomas Cook India Ltd. Specified non trade related current account transactions

Total (976)

Details of the various activities that each of these categories can undertake are given in Annex-1

Authorized Dealers (87) FFMCs (879) Financial Institutions(9) Others(1)

All permissible current and capital account transactions Sale/Purchase of foreign exchange for private and business travel SIDBI, EXIM and IFCI

1. Transactions relating to foreign currency borrowing/ lending debt servicing and trade finance (both fund and non-fund based) which are incidental to the normal functions.

2. Maintaining foreign currency accounts with banks, correspondents abroad.

3. Investing surplus foreign currency balances in accordance with RBI/GoI guidelines in force.

4. Buying/selling foreign exchange in the domestic as well as international markets in cover of transactions which are incidental to permitted foreign exchange transactions.

5. Entering into forward contracts and other risk management products on behalf of clients as also for own balance sheet management.

6. Maintaining open exchange/gap positions arising on account of the above transactions up to the limits approved

7. Offering long dated foreign currency-rupee swaps to clients/non-clients

8. Availing temporary overdrafts from the correspondent banks for activities related to negotiation of payment under the letter of credit, other payments etc.

9. Undertaking foreign currency rupee sell/buy swaps

10. Extending pre and post-shipment credit facility. (only SIDBI)

Clearing Corporation of India Ltd. (CCIL)1. Maintaining foreign currency accounts with a settlement bank outside India.

2. Accept foreign currency deposits from Authorised Persons who are members of CCIL

3. Invest the foreign currency funds placed as deposits by the clearing members in US $ Treasury Bills/Notes or other US Government Securities.

4. Avail one or more Lines of Credit from the settlement bank outside India to facilitate the clearing operations.

5. Access the domestic forex markets, either directly or through an Authorised Dealer, in case of default by any of the clearing members or for making remittances incidental to forex clearing and settlement operations.

Factoring agencies

a. Provide import factoring, assuming all the relevant obligations enjoined on Authorised Dealers in respect of import transactions as per extant exchange control regulations.

b. Handling of all Import/Export documents relating to factoring services and forfeiting transactions.

c. Acceptance and release of GR Forms.

d. Maintenance of Nostro Account balances commensurate with the business needs.

e. Undertaking forex cover operations purely to hedge exposures occasioned by factoring/forfeiting.

f. Make payments towards various charges incidental to factoring/ forfeiting to overseas associates/forfeiting agencies.

g. Export factoring to be provided on 'with recourse basis' and forfeiting on 'without recourse basis'.

h. In cases where exporters have availed of pre-shipment finance, funds/discounted value of forfeiting bills should be transferred direct to the concerned bank in foreign currency/ rupee as the case may be.

i. Permitted to consider the requests (i) for reduction in invoice value, (ii) payment of agency commission and (iii) write off of export proceeds from your exporter clients under extant rules and regulations as applicable to authorized dealer in foreign exchange. 1. Sale/purchase of foreign exchange for private and business travel, including for medical treatment, participation in conferences/exhibitions/fair, competitions, training, education abroad, membership of International Organizations etc..

2. Remittances by tour operators / travel agents to overseas agents / principals / hotels, Film shooting,

3. Reimbursement of travel expenses of foreign nationals on business visits to India, / temporarily engaged by organizations in India., Payment of crew wages, Remittance towards cultural tour where prior approval has been obtained from the Ministry of Human Resource Development, Remuneration for visiting professionals who are on a short-term assignment in India.

4. Remittance for educational tie up arrangements with universities abroad, examination fees etc.

5. Visa/Emigration/ Emigration Consultancy Fees, assessment fees for overseas job applications etc.

6. Maintenance of close relatives abroad.

REVIEW The Reserve Bank has been receiving representations from existing Full Fledged Money Changers (FFMCs) requesting to expand the scope of the foreign exchange transactions that they are permitted to undertake. These requests were revisited by the Group in the light of on going liberalization in foreign exchange transactions, convenience of the tourists, improved technology and with an object to rationalize the institutional structure and expand the number of entities eligible to undertake foreign exchange transactions, while ensuring appropriate safeguards against misuse. In the light of the above, the Group had detailed discussions on the transactions that various entities are permitted to undertake and also the growing need of the common person and tourist for foreign exchange transactions in the light of progressive liberalization over the last 15 years as well as globalization of the Indian economy. The Group feels that there is a distinct growing demand to undertake current account foreign exchange transactions that are not related to trade but are required to meet miscellaneous needs of common person like fees and maintenance expenses of students, foreign exchange for medical treatment etc.

RECOMMENDATIONS With a view to providing adequate foreign exchange facilities to common persons the Group, observes that for efficient customer service through competition there is a need to widen the scope of activities which the Authorized persons are eligible to undertake and also to increase the number of entities that are eligible to sell foreign exchange to public for their day-to-day current account transactions. The Group, therefore, recommends that Reserve Bank may consider granting licenses to certain entities to undertake some more transactions, in addition to what FFMCs are currently permitted, by authorizing them to undertake certain non-trade related current account transactions. Such entities may be called Restricted Authorized Dealers (Restricted ADs). Proposed Classification of Entities Sl. No. Category of license (Number) Entities Major Activities

1 Authorized DealersCommercial Banks ,

State Co-op Bank ,

Urban Co-op Bank , All current and capital account transactions according to RBI directions issued from time-to-time.

( No Change)

2.Restricted Authorized Dealers (RADs)

i) Category-I Financial Institutions

EXIM, IFCI, SIDBI ,CCIL and

Factoring Agencies Activities incidental to financing of international trade related activities undertaken by these institutions. (No Change)

ii) Category-II 1. Upgraded FFMCs

2. Select UCBs

3. Select RRBs

4. Thomas Cook India Ltd. Specified non-trade related current account transactions as at Para. 6.3 of the Report

3 Full Fledged Money Changers (FFMCs)

Department of Post

Urban Coop Bank

Other FFMCs Sale/Purchase of foreign exchange for private and business visits Abroad.

(No Change)

The Group recommends that RADs-Category II may be permitted to release foreign exchange for the following transactions:

Private Visits, Remittance by tour operators / travel agents to overseas agents / principals / hotels,

Business Travel, Fee for participation in global conferences and specialized training

Remittance for participation in international events / competitions (towards training, sponsorship and prize money). Film shooting, Medical Treatment abroad, Disbursement of crew wages, Overseas Education, Remittance under educational tie up arrangements with universities abroad, Remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL etc., Employment and processing, assessment fees for overseas job applications, Emigration and Emigration Consultancy Fees, Skills / credential assessment fees for intending migrants, Visa fees,

Processing fees for registration of documents as required by