The Hindu Business Line : Resident Indians may get to trade in currency futures

Minimising risks
A currency future is an exchange-traded derivative that allows investors to sell or buy a currency at a fixed price on a future date.
To begin with, trading would be allowed only in rupee-dollar contracts.

Our Bureau

Mumbai, Nov. 16 Resident Indians may soon have a new instrument to hedge themselves against exchange rate fluctuations. A panel appointed by the Reserve Bank of India has recommended trading in currency futures on dedicated exchanges.

A currency future is an exchange-traded derivative that allows investors to sell or buy a currency at a fixed price on a future date.

To begin with, futures trading would be allowed only in rupee-dollar contracts.

The Indian rupee has appreciated by around 11 per cent against the dollar this calendar year.

In the first phase, the panel recommends that only resident Indians should be permitted to trade in currency futures.

Once appropriate surveillance, monitoring and reporting systems are set up, the committee recommends that FIIs and NRIs may be allowed to participate.

The committee has suggested setting up of dedicated exchanges and settlement systems. Banks and ‘eligible brokers’ can be the members of the Exchange.

Two types of membership — hedgers and speculators — may be allowed. The responsibility of fixing margins for these categories may be left to the Exchanges.

In terms of size, the group has suggested the introduction of a single contract of a notional value of $1,000 and that currency futures maturing in the first 12 calendar months may be offered in line with the existing over-the-counter forward market.

There may not be any quantitiative restrictions on trading members.

NRI memberships

The Group recommends that when residents outside India are permitted access to the currency futures market, they may be allowed membership as hedgers only.

Participants would be allotted unique client identification numbers.

The RBI would be the regulator and retain the right to stipulate or modify the participant-wise position limits or any other prudential limits in the interest of financial stability.

Initially, the RBI panel has recommended a standardised product across various exchanges in terms of contract size, final settlement dates, settlement procedure of contracts, and tenors of contracts. This would also discourage situations of unhealthy competition among the Exchanges, the group said.

It also proposes that settlement should be only on cash-basis, based on spot Reserve Bank reference rate on the expiry date.

The main advantage of currency futures over its closest substitute product — forwards that are traded over the counter — is the price transparency, elimination of counter-party credit risk, and wider reach.

“Globalisation and increased cross-border flow of funds have increased the exposure to market risk and hedging of such exposures has become critical. The need for introduction of currency futures has to be viewed in the context that wider hedging opportunities could strengthen economic agents’ ability to cope with market-induced currency movements,” the panel said.

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