The Hindu Business Line : Exchange-traded currency futures in 3 months

Exchange-traded currency futures will become a reality in the Indian market in the next three months, according to the Chairman of the Securities and Exchange Board of India, Mr C.B. Bhave.

Already, SEBI has put out on its Web site a concept paper on the basis of which exchange-traded currency futures can be established in the country.

“We have invited stock exchanges to apply for trading currency futures. I am hopeful our intermediaries will act fast and take the cue and in the next three months we will see the start of exchange-traded currency futures in the country,” Mr Bhave said at Assocham’s annual general meeting here today.

The futures contract

A currency futures contract is a type of financial futures contract where the underlying is an exchange rate. A futures contract is a standardised contract, traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price.

Where the underlying security happens to be a financial asset or instrument, the contract is referred to as “financial futures”. Currency futures are used primarily as a price-setting mechanism rather than for physical exchange of currencies.

Ready for more

Stating that SEBI was keen to enable the offering of as many products as possible in the market, Mr Bhave said that work would start on interest rate derivatives soon after the exchange-traded currency futures were launched.

“The same committee that RBI and SEBI appointed to go into the technical issues of exchange-traded currency futures would also go into interest-rate futures,” Mr Bhave said.

In India, currency futures are already allowed in the over-the-counter (OTC) market. But exchange-traded currency futures have so far not been allowed in view of the imperatives of the control on the capital account.

However, in the context of increased capital account liberalisation, it is believed that exchange-traded currency futures could provide wider hedging opportunities to cope with market-induced currency movements.

Mr Bhave said that SEBI and RBI were seeing whether the OTC market could come on to the exchanges as all over the world the experience has been that the exchange-traded market is far easier to regulate, far easier to contain risk than the OTC market.