FEDAI rules for forex dealings: value dates, margins and forward cancellation

Every merchant quote a bank gives an exporter, and every forward contract it cancels, is governed by the FEDAI rules for forex dealings — the market-practice code that sits between RBI's regulatory framework and the day-to-day conduct of an authorised dealer's treasury. IIBF's Treasury Management paper tests this area heavily because it is procedural: value dates, exchange margins, swap cost recovery and crystallisation are all rule-driven, and examiners like rule-driven topics. This guide walks through the framework the way the exam asks it.

🏛️ FEDAI's role alongside RBI in the forex market

The Foreign Exchange Dealers' Association of India (FEDAI) is a non-profit association of authorised dealers (ADs), incorporated in 1958. It is not a regulator. RBI is the regulator, deriving its powers from FEMA, 1999, and issuing Master Directions on risk management and inter-bank dealings. FEDAI supplies the market conventions that make those directions operational.

Think of the split like this: RBI decides what an AD may do — which products, which counterparties, which limits. The FEDAI rules for forex dealings decide how the AD does it — how a rate is quoted, when a contract settles, what a customer pays when a contract is cancelled. Membership is effectively universal among ADs, so the rules operate as binding market practice rather than voluntary guidance.

FEDAI's functions cluster into four areas:

• Framing and revising rules covering inter-bank and merchant transactions
• Publishing reference material — revaluation rates, market conventions, notional due-date practice
• Training and accreditation of dealers, and dealing-room conduct standards
• Acting as the market's voice with RBI on operational issues

For a structural view of where the forex segment sits relative to money, debt and capital markets, revise the chapter on Financial Market before attempting rate-calculation questions. More articles on this paper are collected on the Treasury Management tag hub.

📌 Remember: FEDAI is an association of ADs, not a statutory regulator. Questions phrased as "who regulates forex business in India" are answered by RBI under FEMA — FEDAI only standardises market practice.

💱 Quotations, exchange margins and merchant rates

Inter-bank quotes in India are direct quotes: a fixed unit of foreign currency against a variable number of rupees. The dealer quotes two-way — bid and offer — and the market maker always buys at the lower figure and sells at the higher. The exam's evergreen shortcut is the maxim of the dealer: buy low, sell high; and for the customer-facing side, the bank applies the rate more favourable to itself.

A merchant rate is never the raw inter-bank rate. Under the FEDAI rules for forex dealings, the dealer starts from the ruling inter-bank rate — the base rate — and then loads an exchange margin. For a sale to the customer the margin is added; for a purchase from the customer it is deducted. Margins are no longer prescribed as a uniform number by FEDAI; each bank fixes them within its own board-approved policy, which is why margins differ across banks and across transaction types.

The rate hierarchy

Merchant rates cascade by how quickly the bank gets its funds:

• TT buying rate — nostro already credited, no delay; the finest buying rate
• Bill buying rate — a transit/usance period is loaded, so the rate is worse for the customer
• TT selling rate — clean outward remittances
• Bill selling rate — where the bank also handles documents, so a further margin applies

Rates are quoted to four decimal places and rupee amounts payable are rounded to the nearest whole rupee. Understanding how these rates feed the balance sheet is easier after the chapter on Scope and Function of Treasury Management. Corporates that dislike repeated margin loading often move to longer-dated structures instead — see our note on currency swaps for corporate hedging.

📅 Value dates: cash, TOM, spot and forward

Value date is the day the funds actually change hands, and it is the single most examinable convention in this topic. The standard ladder is:

• Cash / ready — settlement on the deal date itself
• TOM — settlement on the next business day
• Spot — settlement on the second business day after the deal date
• Forward — any value date beyond spot

The holiday test trips up most candidates. A value date must be a working day in the settlement centres of both currencies. For a USD/INR deal, both Mumbai and New York must be open; if either is shut, the value date rolls forward to the next common working day. A Saturday is not a value date in the inter-bank market even where a domestic branch is open.

Forward margins are quoted as premium or discount on the spot rate. In direct-quote terms, a currency at a premium is costlier forward — so premium is added to the buying and selling rates, and discount is deducted. Forward periods are normally quoted for calendar months from the spot date; a forward contract can also be booked with an option period, where the customer may deliver on any day within a stated window, and the bank prices the option period at the rate least favourable to the customer.

Because forward pricing rests on the interest-rate differential, candidates should also be comfortable with rupee yields — the government securities auction process feeds the same curve, and current policy rates are tracked on our RBI rates page.

💡 Exam Tip: Read "second business day" literally. If the deal is struck on a Thursday and Friday is a holiday in one centre, spot is not Monday by default — count only common working days in both centres.

🔁 Early delivery, extension and cancellation of forward contracts

A forward contract is a firm commitment. When the customer cannot perform on the agreed date, the FEDAI rules for forex dealings require the bank to unwind or reposition its own cover in the market and pass the economics to the customer. Three situations arise.

Early delivery — the customer delivers or takes delivery before the contract date. The bank must swap its cover from the original date to the earlier date. The resulting swap difference is recovered if it is a cost and passed on if it is a gain. Where the swap leaves the bank out of funds until the original date, interest on the outlay is recovered from the customer; a flat charge is also levied.

Extension — the contract is cancelled at the ruling rate and simultaneously rebooked for the new date at the current rate for that maturity. The exchange difference on cancellation is settled with the customer immediately; it is not netted into the new contract. A flat charge applies here too.

Cancellation — a forward purchase contract (the bank buying from the customer) is cancelled at the ruling TT selling rate; a forward sale contract is cancelled at the ruling TT buying rate. The difference is recovered from or paid to the customer.

Where a matured contract is neither used nor extended and the customer gives no instructions, the bank cancels it on a stipulated working day shortly after maturity, at the bank's option and at the customer's cost. Documentation of these unwinds mirrors derivative practice generally — compare the ISDA master agreement in treasury. The book entries are covered in Accounting and Valuation.

⚠️ Common Mistake: Candidates net the cancellation difference into the extended contract. Under FEDAI practice the old contract is cancelled and settled in cash with the customer first; the new contract is booked independently at the ruling rate.

⏳ Overdue export bills, crystallisation and dealing-room conduct

When an export bill purchased or negotiated by the bank is not realised by its notional due date, the bank carries an open foreign currency exposure it never intended. Crystallisation converts that exposure into a rupee liability of the exporter: the foreign currency bill is converted at the ruling TT selling rate, and the customer's account is debited with the rupee equivalent plus interest and charges. From that point the exchange risk sits with the customer, not the bank.

The timing is the part to state carefully. FEDAI previously prescribed a uniform crystallisation day; the position now is that each AD frames a board-approved policy setting the crystallisation period, disclosed to customers, with overdue import bills treated on a comparable basis. In the exam, answer the mechanism — TT selling rate, rupee debit, risk transfer — and describe the timing as governed by the bank's declared policy.

The other examinable strand is conduct. Dealing rooms operate under a code covering dealing hours, use of brokers, confirmation and deal-slip discipline, prohibition on personal dealing, off-premises and after-hours dealing controls, and clear front-office/back-office segregation. India's alignment with the global FX Code is coordinated through the RBI-constituted India Foreign Exchange Committee, and FEDAI supports dealer training and accreditation.

Study this alongside the chapter on Ethics, Morals and Code of Conduct for the Dealing Room. Settlement discipline in the rupee leg is equally examinable — read our piece on CCIL and settlement of government securities.

🧠 Practice MCQs: FEDAI rules and forward contracts

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❓ Frequently Asked Questions

Master this block and you cover a predictable slice of the Treasury Management paper: rate construction, value dates, forward unwinds and crystallisation recur every cycle. Work the numericals until the direction of each adjustment is automatic, then test yourself under time pressure with the chapter-wise banks in our CAIIB and certificate course library or jump straight into free mock tests.