The State Bank of Pakistan has amended the 'financial derivatives business regulations' to facilitate derivatives transactions of authorised derivative dealers and non-market maker financial institutions who would now use long-term confirmation in place of 'International Swaps and Derivatives Association Agreement' (ISDA) for certain derivative transactions.
In a letter to all banks and development financial institutions (DFIs) on Friday the SBP Banking Supervision Department said that financial derivative business regulations (FDBR), issued on November 26, 2004, (Circular No 17) has been amended.
To facilitate the derivatives transactions of authorised derivative dealers or non-market financial institutions (ADDs/NMIs) it has been decided to allow the use of long-term confirmation in place of ISDA for certain derivative transactions. Consequently, the existing regulation No 33 of the FDBR is replaced with immediate effect.
According to the change, no derivative transaction will be executed by the ADDs/NMIs unless ISDA has been exchanged with other entity. However, for foreign exchange (FX) options, long-term confirmation, instead of ISDA master agreement, can be used, provided: a) the tenor of FX option is up to one year; b) the notional principal of the FX option is up to $2 million or equivalent; and c) the aggregated notional principal of all derivative transactions, including interest rate swap (IRS) and forward rate agreements FRAs, executed with the other entity by the ADD/NMI during immediate last 12 months is up to $20 million or equivalent.
As soon as the aggregated notional principal exceeds the limit of $20 million, the ADD/NMI should enter into ISDA master agreement with the other entity before entering into the transaction, which results in such excess.
For calculating the aggregated notional principal, the gross amount matured or outstanding should be used.
Other conditions of Circular No 17 of November 26, 2005 remain the same.