Coming soon, easier norms for currency derivatives trading

Shishir Sinha New Delhi | Updated on December 28, 2014

Regulators mull wider position limit, longer trading hours

Market regulator Securities & Exchange Board of India (SEBI), in consultation with the Reserve Bank of India, is set to relax norms in the currency derivative market.

“The two regulators are working together to relax the open position limit and extend the time for the market. Circulars in this regard are expected to be out very soon,” a highly-placed source told BusinessLine.

The moves are in line with the Budget announcement made by Finance Minister Arun Jaitley, where he called for deepening the currency derivative market.

Currency derivatives are like any other derivative products that have no independent value. Instead, their value is entirely ‘derived’ from the value of the underlying asset, in this case, the currency.

Two forms

At present, two forms of derivative products are available – futures and options. Futures trading can be conducted in four currencies – dollar, euro, pound and yen – while options trading can be done only in dollars.

The basic difference between futures and options lies in the obligations. If a futures contract gives a buyer or seller an obligation to buy or sell, then an options contract gives a buyer or seller the right, not obligation, to buy or sell.

Position limit

The objective is to raise the open position limit, as sources said, there is stability in the market.

In order to curb extreme volatility, SEBI revised the position limits for exchange traded currency in consultation with the RBI in July last year and curtailed position limits and increased the margin requirements. The positions were reviewed in June and October this year.

Accordingly, the gross open position of a client across all contracts will not exceed 6 per cent of the total open interest or $10 million/€5 million/£5 million/¥20 million (whichever is higher).

At the same time, the gross open position of a trading member, who is not a bank, across all contracts, has been capped at 15 per cent of the total open interest or $50 million/€25 million/£25 million/¥1000 million (whichever is higher).

Trade timing

SEBI also plans to extend the trading in the currency derivative till7.30 p.m. instead of 5 p.m. Exchanges — BSE, NSE and MCX-SX — have been demanding extension of trading hours to facilitate market participants to adjust and alter their positions in line with currency movements in global markets.

Also, longer trading hours will help in controlling sharp volatility in currency markets abroad, such as Singapore, where domestic regulators have no control.

The currency derivative market got a boost in June this year when the RBI allowed foreign portfolio investors (FPIs) to hedge their investment in India.

This can be done by accessing the currency futures or exchange traded currency options market. FPIs include foreign institutional investors and qualified foreign investors.

Earlier, such investors, wanting to hedge their equity positions, had to go abroad. The move is expected to boost forex inflow.

Published on December 28, 2014

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