1. What is a Rollover and What is the Legal Duty?

A rollover is extension of an expiring derivative / FX forward / futures contract into a new expiry.

Legal obligation to price at prevailing rate arises from:

• RBI Master Direction on Forex - Forward contracts must be booked at market rates. FEDAI rules: client rollover must be at spot rate prevailing on rollover date + forward points differential based on current interest rate parity, not historical rate.
• SEBI / MiFID II Best Execution - Article 27 MiFID II, SEBI Stock Brokers Reg 15 - Dealer must take all sufficient steps to obtain best possible result, including fair pricing based on prevailing market.
• ISDA Master Agreement - Section 6 - Close-out / determination of Loss / Close-out Amount must be done in good faith and using commercially reasonable procedures and must reference prevailing market quotations.
• FX Global Code & NY Fed FXC Letter 1991 - Historical rate rollovers - rolling at off-market rates to hide a loss - is explicitly called "a dangerous practice" that misstates P&L and violates accounting principles.

If a bank prices a rollover at historical rate instead of prevailing rate, it is effectively extending credit and hiding loss.

2. Two Types of Failure

A. Active Failure - Historical Rate Rollover:
Dealer rolls at old rate e.g. Client bought USD/INR at 82, market now 84. Loss 2 rupees. Dealer rolls at 82 to avoid crystallizing loss, charges hidden interest. Violates RBI, accounting AS-11, and constitutes mis-selling.

B. Passive Failure - Failure to Reference Market:
Dealer calculates rollover using model price or internal markup, not obtaining dealer quotations. Fails ISDA "commercially reasonable" test.

3. Consequences

1. Contract voidable for misrepresentation / undue influence
2. Regulatory penalty for off-market pricing - SEBI, RBI, FCA, CFTC
3. Tax disallowance - rollover premium treated as capital vs revenue incorrectly
4. Obligation to re-price and pay difference + interest

4. Leading Case Laws

On Historical Rate Rollovers

1. Federal Reserve Foreign Exchange Committee Letter on Historical Rate Rollovers, 26 Dec 1991
The seminal regulatory statement. The Committee stated rolling contracts at historical rates is a dangerous practice which conceals true profit and loss, extends credit without proper approval, and violates accounting rules. This letter is cited by RBI and all Indian banks' compliance manuals.

2. ACIT vs Elecon Engineering Co. Ltd, Civil Appeals 2057-2065 of 2010, Supreme Court of India - 26 Feb 2010
Core Indian case on rollover charges. Supreme Court held roll over charges paid on foreign exchange forward contracts for import of machinery must be adjusted to cost of asset under Section 43A. Established that rollover is not a separate transaction, it is continuation, and pricing must reflect prevailing exchange fluctuation on date of rollover. Tax treatment depends on prevailing rate on that date

3. CFTC Action for Attempted Manipulation of USD ISDAFIX - 2007-2012 period
US CFTC fined US investment arm of international bank for attempted manipulation of USD ISDAFIX benchmark, which is the prevailing mid-market rate for fixed leg of interest rate swaps. Bank attempted to move benchmark to benefit its rollover pricing. Penalty for not pricing based on genuine prevailing rate

On Duty to Use Prevailing Market Quotations

4. Lehman Brothers International (Europe) v. AG Financial Products Inc, 60 Misc.3d 1214(A) NY Commercial Division - July 2, 2018
Court held whether non-defaulting party's choice to calculate "Loss" under 1992 ISDA Master Agreement without reference to market prices was reasonable and in good faith raises triable issue. ISDA definition of Loss = "a party may determine its Loss by reference to quotations of relevant rates or prices." Failure to check market = bad faith

5. Lehman Brothers Finance AG v. Klaus Tschira Stiftung, [2019] EWHC 379 (Ch)
Snowden J held Loss calculation not in accordance with ISDA if not based on close-out provisions and prevailing quotations. Tribunal cannot use internal modeled valuations where they differ from actual dealer quotations obtained at relevant time

6. Lehman Brothers Special Financing Inc v. National Power Corp, [2018] EWHC 487 (Comm)
English High Court: judge unwilling to accept mark-to-market valuations or modeled evaluations as evidence for price at which replacement transaction would have been available where they differed from actual quotations obtained from leading dealers in market at relevant time. You must go to market

On FX Re-pricing and Market Practice

7. CFH Clearing Ltd v. Merrill Lynch International, [2019] EWHC 963 (Comm) and [2020] EWCA Civ 1064 - The Swiss Franc De-pegging Case
During 2015 Swiss Flash Crash, CHF moved 20% in minutes. Client positions liquidated at extreme off-market rates. CFH argued bank must re-price to prevailing "official low" EBS rate based on market practice. Court of Appeal held ISDA Master Agreement prevails over standard T&Cs, and does NOT incorporate an implied obligation to comply with "market practice" so as to require re-pricing. Key takeaway: If you WANT protection that rollover will be at prevailing rate, you must write it expressly in Schedule. Market practice alone won't save you

8. Target Rich International Ltd v. Forex Capital Markets Ltd, [2020] EWHC 1544 (Comm)
Claim for late execution of stop loss orders at disadvantageous rates after Swiss de-peg. Court held no implied duty to execute at prevailing market price during severe market turbulence unless express term. Distinguishes between normal markets (where best execution duty applies) and disrupted markets.

9. OPG Securities Pvt Ltd v. SEBI, Civil Appeal 3548 of 2010, Supreme Court 4 Dec 2015
While on fee turnover, it establishes SEBI's power to police artificial pricing and reversal trades in derivatives that distort prevailing market price. Penalty for trades not at prevailing market rate upheld

5. Indian Regulatory Position Today

• RBI Circular DBOD No. BP.BC. 3/21.04.048/2005-06 - Forex forward rollovers must be at prevailing market rates, cancellation and re-booking at market.
• FEDAI Rule 4.5 - Rollover rate = prevailing spot + forward premium at prevailing interest differential - not historical.
• SEBI Circular on Product Suitability - If bank fails to price rollover at prevailing rate and client suffers loss, it is mis-selling, bank must compensate and report to SEBI.

6. Remedy if Your Counterparty Failed to Price at Prevailing Rate

1. Ask for time-stamped dealer poll - ISDA requires 3-4 dealer quotations at rollover time.
2. Compare with FEDAI / FBIL / Bloomberg BFIX rate for that minute.
3. File complaint with RBI Ombudsman for forex or SEBI SCORES for derivatives - cite FXC 1991 letter and ISDA commercially reasonable standard.
   1. Legal claim: breach of Section 18 of Indian Contract Act (misrepresentation) + violation of RBI directions + breach of ISDA good faith.