To stabilise the depreciating rupee, the Reserve Bank of India has prohibited banks from trading on their own behalf in the currency futures and exchange traded currency options till further orders.
However, banks can trade on behalf of their clients, it said.
On its part, the Securities and Exchange Board of India has curtailed the position limits and increased the margin requirements for currency derivatives.
The open position for clients in currency derivatives has been reset at the lower of six per cent of open interest and $10 million. Earlier, it was the higher of the two.
The open position for brokers in currency derivatives has been reset at the lower of 15 per cent of open interest and $50 million. Earlier, it was the lower of 15 per cent of open interest and $100 million.
The total number of options and futures contracts that are not closed or delivered on a particular day is called open interest. If a trader buys three futures contracts and sells three contracts in a day, the open interest is zero while volume is six.
In case, he buys three and sells one, the volume is four while the open interest is two.
SEBI has increased the margin requirements for brokers by 100 per cent. The price range for rupee dollar was earlier based on a worst case of 0.047 per cent chance of losing money with rupee dollar prices changing at the rate of three per cent.
With the rupee significantly weakening against the dollar, the Reserve Bank of India has directed banks authorised to deal in foreign exchange to refrain from carrying out proprietary trading in the currency futures/exchange traded currency options markets.
The RBI has issued this directive, which has come into effect immediately and be in force till further orders, in view of the “evolving market conditions’’.
In other words, any transaction by banks in the currency futures/exchange traded currency options markets will have to be necessarily on behalf of their clients.