Over the years the foreign exchange market in India has shown significant growth in terms of volumes, product range, liquidity, and participation level. The average daily turnover in the foreign exchange market in March 2007 was a whopping 33 billion USD. Due to lack of exchange traded currency instruments, these transactions were done in over-the-counter (OTC) market like currency forwards, swaps, and options. There was always a need for a more developed currency markets in India to match the international standards.
Benefits of Exchange traded over OTC
The exchange trading makes the transaction more transparent. The price discovery is more efficient in case of exchange trading because of presence of large number of market players. It also offers trading opportunity for relatively smaller players because of small contract size compared to OTC market. Moreover, in exchange traded products the counter-party risk is eliminated by the clearing corporation. Using electronic trading superior risk management systems can be used for exchange trading thereby minimizing the overall risk in the portfolio.
In August 2008, RBI and SEBI allowed selected exchanges to offer currency trading and issued guidelines for the same. RBI & SEBI allowed USD-INR to be traded on exchange. The size of the contract will be USD 1000. The contract can have a maximum maturity of 1 year and it should be quoted and settled in Indian Rupees. Settlement price will be the RBI’s reference rate. Some more specific details in the guidelines about the currency derivatives were:
Underlying
Source: BSE, NSE, RBI, SEBI websites
Benefits of Exchange traded over OTC
The exchange trading makes the transaction more transparent. The price discovery is more efficient in case of exchange trading because of presence of large number of market players. It also offers trading opportunity for relatively smaller players because of small contract size compared to OTC market. Moreover, in exchange traded products the counter-party risk is eliminated by the clearing corporation. Using electronic trading superior risk management systems can be used for exchange trading thereby minimizing the overall risk in the portfolio.
In August 2008, RBI and SEBI allowed selected exchanges to offer currency trading and issued guidelines for the same. RBI & SEBI allowed USD-INR to be traded on exchange. The size of the contract will be USD 1000. The contract can have a maximum maturity of 1 year and it should be quoted and settled in Indian Rupees. Settlement price will be the RBI’s reference rate. Some more specific details in the guidelines about the currency derivatives were:
Underlying
- US Dollar – Indian Rupee (US$-INR)
- The trading on currency futures would be available from 9 a.m. to 5 p.m.
- US$ 1000
- The currency futures contract would be quoted in rupee terms.
- The currency futures contract shall have a maximum maturity of 12 months.
- All monthly maturities from 1 to 12 months would be made available.
- The currency futures contract shall be settled in cash in Indian Rupee.
- The settlement price would be the Reserve Bank Reference Rate on the date of expiry.
- The currency futures contract would expire on the last working day (excluding Saturdays) of the month.
Pursuant to the guidelines BSE and NSE have started currency derivative trading. The Currency Futures trading at BSE takes place through a fully automated screen-based trading platform called BSE-CDX (BSE's Currency Derivatives Exchange). The CDX is designed to allow trading on a real-time basis. In addition to generating trades by matching opposite orders, the CDX also generates various reports for the Member participants.
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The Trading Member will be subject to a balance sheet net worth requirement of Rs. 1 crore while the Clearing Member would be subject to a balance sheet net worth requirement of Rs 10 crore. Banks authorized by the Reserve Bank of India under Section 10 of the Foreign Exchange Management Act, 1999 as 'AD Category - I bank' are permitted to become Trading and/or Trading-cum-Clearing Members of the Currency Futures market, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:
a. Minimum net worth of Rs. 500 crore.
b. Minimum CRAR of 10 %.
c. Net NPA should not exceed 3 %.
d. Bank should have made a net profit in last 3 years.
The Trading Members and sales persons in the Currency Futures market must pass a Certification Programme which is considered adequate by SEBI. BSE Training Institute offers a training course and it also separately runs a Certification Programme. All approved users and sales personnel of the Trading Member are required by SEBI to have passed the Certification Programme."
Source: BSE, NSE, RBI, SEBI websites
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