CONTENTS
PAGE
1 Traded volumes on all exchanges 3
2 No. of contracts traded on all exchanges 4
3 Month-end open interest 5
4 Spat between NSE and MCX-SX 6
5 Success rate of currency futures in India 7
6 Preamble to currency futures 8
7 Definition of currency futures 9
8 Basic aspects of currency futures 9
9 RBI’s eligibility criteria for Banks 10
10 Old versus New market (Forwards vs futures) 10
11 Eligibility criteria for dealing in currency futures 11
12 Mechanism involved 11
13 Benefits of currency futures 12
14 Their limitations 12
15 SEBI’s rule on open position limits 13
16 Impact of currency futures 13
Annexure 1 (initial, calendar spread & extreme loss margins) 15
Annexure 2 (SEBI’s position limits for four currency pairs) 16
References 17
Abbreviations used:
NSE : National Stock Exchange BSE : Bombay Stock Exchange
MCX-SX : MCX Stock Exchange RBI : Reserve Bank of India
FII : Foreign Institutional Investor NRI : Non Resident Indian
USD : US Dollar EUR : Euro
INR : Indian Rupee GBP : Pound Sterling
JPY : Japanese Yen
SEBI : Securities and Exchange Board of India
NCFM : NSE’s Certification in Financial Makets
NISM : National Institute of Securities Market
Rama Krishna Vadlamudi, BOMBAY January 30, 2010
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It is almost one and a half years since the introduction of currency futures under
the currency derivatives segment of Indian stock exchanges. The volumes have
increased tremendously on NSE and its arch rival MCX-SX, the two dominant
exchanges of trading in currency futures; while on BSE practically there have
been no volumes in the last six months or so. Trading in currency futures had
started by NSE on August 29, 2008. This article examines the volumes traded on
these and explains the basics of currency futures in a comprehensive manner.
NSE and MCX Stock Exchange are launching futures trading in three new
currency pairs, namely, EUR-INR, GBP-INR and JPY-INR on February 1, 2010
following the decision of RBI to introduce the additional pairs. RBI and SEBI had
issued their guidelines for these three pairs on January 19, 2010.
RBI’s decision to introduce more currency pairs for currency futures
trading is welcomed by the industry:
The introduction of these new currency pairs has been anticipated for some time
by the industry. Now, that the RBI at last is permitting more currency pairs in
currency futures, this is good news for the industry.
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2 00 000
1 84 813
1 80 000
1 60 000
1 43 348
1 40 000
1 24 900
1 20 000
99 464
1 00 000
80 000 77 244
63 963
60 000
45 805 48 404
40 000
31 140
20 000 17 429
5 763
291
Aug.08 Sep.08 Oct.08 Nov.08 Dec.08 Jan.09 Feb.09 Mar.09 Apr.09 May.09 Jun.09 Jul.09
Table 1: Traded volumes on all exchanges for USD-INR pair (Data: SEBI)
As can be seen from the above table, the trading volumes on these exchange-
traded currency futures have risen tremendously in the last one year. Let us take
note of the volume increase between December 2008 and July 2009. The
volumes have surged by four times during that period from Rs 0.46 lakh crore to
about Rs 1.85 lakh crore. The cumulative volume between August 2008 and July
2009 works out to Rs 8.50 lakh crore (Latest data available is up to July 2009).
During FY 2008-09, total traded volume was only Rs 869 crore on BSE;
practically this exchange is out of the currency futures market. In the last six
months of the current financial year, there are practically no volumes on BSE.
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380.77
400.00
350.00
299.22
300.00
257.36
250.00
193.89
200.00
153.99
129.18
150.00
93.89 98.93
100.00
63.00
35.57
50.00
12.58
.66
.00
Aug.08 Sep.08 Oct.08 Nov .08 Dec.08 Jan.09 Feb.09 Mar.09 Apr.09 May .09 Jun.09 Jul.09
Table 2: Number of contracts traded for USD-INR pair only (Data: SEBI)
Total number of contracts have grown from 94 lakh in December 2008 to 380
lakh in July 2009, a dramatic increase of four times in just seven months. All
these trading volumes are happening in just two exchanges, NSE and MCX-SX.
The cumulative number of contracts works out to 1,720 lakh between August
2008 and July 2009. Some more exchanges are waiting in the wings to introduce
currency futures. Trading may start in the next few months in another new stock
exchange, namely United Stock Exchange of India.
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3 500
3 196
3 000
2 660
2 416 2 491
2 500 2 303
2 216
Rs crore
2 000
1 571
1 449
1 500
1 153
1 019
1 000
428
500
72
08
9
09
09
8
9
08
08
08
09
.0
.0
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.0
.0
n.
n.
v.
g.
p.
c.
b.
ay
ct
ar
Ju
Ap
No
Ja
Ju
De
Au
Se
Fe
O
Table 3: Month-end open interest for USD-INR pair only (Data: SEBI)
The month-end interest used was in the order of Rs 2,300 crore at the end of
March 2009. By July 2009, it has reached Rs 3,200 crore. Compared to the
traded volumes on the exchange, there has been no dramatic increase in the
open interest at month-ends.
Now, the rupee has suddenly started appreciating dramatically in the first week of
October 2009, it would be interesting to watch how things are being panned out
in the currency futures market. Obviously, volumes will grow up by several folds
during the current month as more speculators and players may be attracted
towards the currency futures. Between the end of Sept. 09 and beginning of
Oct.09, Rupee has appreciated by 150 paise or about three per cent against the
US dollar. Such a large movement in the exchange rate is quite unusual.
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MCX-SX
NSE
48%
52%
Both the NSE and MCX-SX are snapping at each other heels since the beginning
of trading in currency futures last year. Trading in currency derivatives started on
August 29, 2008 at NSE; on October 1, 2008 at BSE and on October 7, 2008 at
MCX-SX. Last year, MCX-SX's total traded volumes were higher than that of
NSE during the months of December 2008, January 2009 and February 2009.
Except in these three months, NSE has a slight edge in terms of total traded
volumes.
During the financial year 2008-09, NSE's market share was 52%, whereas MCX-
SX's market share was 48%. The same situation continued during the first four
months of the current financial year.
It would be interesting to watch who will be the ultimate winner in the race for the
number one position. As more stock exchanges are likely to enter the fray, the
battle would keep these exchanges on their tenterhooks. And the competition
may prove to be good for the market participants.
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If one goes by the spectacular rise in volumes traded on the stock exchanges,
one can argue that the introduction of currency futures has been a success.
However, volumes alone may not be sufficient to judge the success of this new
derivative product in India. Other criteria could be the depth of the markets,
participation from the various kinds of investors, corporates, and other
stakeholders of the market.
Still there are some creases to be ironed out with regard to Currency Futures.
FIIs and NRIs are still not allowed; even after the new product has been
introduced more than a year back. As stated in the first page of this document,
RBI has now only permitted three more currency pairs – Euro-INR, Japanese
Yen-INR and Pound Sterling-INR also, in addition to US Dollar-INR which was
already permitted. It remains to be seen how these three pairs would perform.
If one compares the daily volume of more than USD 40 billion on the OTC
market, the daily volume of less than USD 2.50 billion on the exchange-traded
currency futures is small. But, over a period of time, with increased participation
and more currencies, the currency futures may become a force to reckon with on
their own – the dominance of exchange-traded derivatives is the norm in
international markets.
The average share of the top ten members in terms of turnover was 56%
for NSE & 63% for MCX-SX for the quarter ended March 2009
There were 353 members at NSE and 327 members at MCX-SX who did
Rs.10 crore or more of turnover during January- March 2009
Under proprietary trading, the share of banks was about 14 per cent on
NSE and 10 per cent on MCX-SX and the share of non-banks was 45 per
cent on NSE and 61 per cent on MCX-SX
One the client side, banks, insurance companies, mutual funds and other
institutions have not got any transactions on behalf of the clients.
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Both RBI and SEBI had jointly constituted a standing technical committee to
evolve a framework for the introduction of exchange-traded currency derivatives
market in India. The committee submitted its report on May 29, 2008. In a long-
awaited move, RBI and SEBI had on August 6th, 2008, disclosed a roadmap for
introducing exchange-traded currency derivatives trading in India. As part of the
continuing economic reforms in India, both regulators have set out guidelines for
stock exchanges as well as banks.
Further, RBI and SEBI came out with their final guidelines on August 6, 2008 for
launching exchange-traded currency futures. In addition to NSE, other
exchanges, like, BSE and MCX, have also introduced trading in currency futures.
A new stock exchange, United Stock Exchange of India, is also expected to start
trading in the next few months.
With effect from January 19, 2010, RBI has permitted currency futures trading in
three more currency pairs, namely, EUR-INR, GBP-INR and JPY-INR; in addition
to USD-INR pair. As per the guidelines dated January 19, 2010, from RBI and
SEBI; NSE and MCX-SX are launching futures trading in these three new
currency pairs with effect from February 1, 2010.
As per the roadmap, SEBI will give permission to recognized stock exchanges for
starting trading in currency derivatives. After obtaining SEBI approval, the
recognized stock exchange will have to approach RBI to obtain permission under
FEMA (Foreign Exchange Management Act) for trading, clearing and settlement
of Currency Derivatives.
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Till August 2008, Resident Indians had the following over-the-counter (OTC) products: 1.
Currency forwards and 2. Swaps and options. These are used by companies, institutions and
residents to hedge their risks. With the introduction of currency futures by SEBI and RBI and
the inauguration of trading of currency futures on NSE in August 2008, only persons resident
in India will have the option of trading in currency futures on recognized stock exchanges.
The differences between OTC products and currency futures are given below:
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Only persons resident in India are allowed to purchase or sell currency futures to
hedge an exposure to foreign exchange rate risk or otherwise. This means
persons resident in India can trade in currency futures without any underlying
exposure to the currency in question. However, persons resident outside India,
for example, like, Foreign Institutional Investors (FIIs) and Non-Resident Indians
(NRI) can not participate in the currency futures market. FIIs usually speculate on
the Indian currency in the non-deliverable forward (NDF) market in Singapore.
Extreme Loss margin is always 1% flat. So, the total margin now is approximately 2.75%
to 3% in all. The above calculation is only for one sided position. If any client takes a
calendar spread position (long in one contract and short in another), the calendar spread
margin shall be at a value of Rs. 400 for a spread of 1 month; Rs 500 for a spread of 2
months, Rs 800 for a spread of 3 months and Rs 1,000 for a spread or 4 months or
more. The benefit for a calendar spread would continue till expiry of the near month
contract. The client can avail the benefit of calendar spread till the maturity of the nearer
leg contract. (These are only for USD-INR pair and for other pairs, see Annexure 1.)
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As the market lot is small (USD 1,000; Euro 1,000; GBP 1,000 and JPY
1,00,000) in currency futures market, small companies and individual investors can
access this market with low transaction costs.
Currency futures involve some costs, like, margin, brokerage, etc. RBI’s
possible intervention in foreign exchange markets to keep the rupee stable may
some times impact the participants who have taken exposure to currency futures.
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1. Trading Member Level: The gross open position of a trading member shall
not exceed 15 per cent of the total open interest or USD 50 million (raised
from 25 million to 50 million on 24.03.2009), whichever is higher. However, if
the trading member is a bank, the gross open position shall not exceed 15 per
cent of the total open interest or USD 100 million, whichever is higher.
2. Client Level: The gross open positions of the client should not exceed 6%
of the total open interest or USD 10 million (raised from 5 million to 10 million
on24.03.2009), whichever is higher.
NSE had started trading on August 29, 2008. Bombay Stock Exchange
started Currency Futures trading on BSE on October 1st, 2008. MCX Stock
Exchange, an arm of MCX Limited, launched currency futures on October 6,
2008. The live trading started on October 7, 2008.
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Small companies also may find the currency futures more attractive compared to
OTC market due to lower transaction costs in currency futures. As the client level
open position limit is pegged at USD 10 million, the currency futures may be
more conducive to small companies as compared to big companies. However,
the OTC market is very big; hence, it remains to be seen how the currency
futures market pans out even though volumes have been robust in the last one
year and a half.
This new instrument is providing banks, exchanges and brokers with a new
avenue for revenues. Till the middle of 2008, banks had been doing currency
dealings through the OTC market. Since then, banks have been offering currency
futures by becoming trading members of the recognized stock exchanges. Banks
need not go to brokers for dealing in currency futures once they become trading
members of the stock exchanges and are permitted to undertake currency
futures trading.
Speculators may also find some arbitrage opportunities between the OTC market
and the exchange-traded currency futures market.
SEBI has mandated that all the existing approved users/sales personnel of the
trading member in the currency derivative segment shall obtain certification from
NISM (established by SEBI). Accordingly, all the users and personnel connected
with the product have to complete this NISM certification, which enables users to
have prior knowledge of all the important aspects of this new product, before the
stipulated date as prescribed by SEBI in this regard.
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Annexure 1
INITIAL MARGIN
USD-INR EUR-INR GBP-INR JPY-INR
The Initial Margin The Initial Margin The Initial Margin The Initial Margin
requirement shall be based requirement would be requirement would be requirement would be
on a worst case loss of a based on a worst case loss based on a worst case loss based on a worst case loss
portfolio of an individual of a portfolio of an of a portfolio of an of a portfolio of an
client across various individual client across individual client across individual client across
scenarios of price changes. various scenarios of price various scenarios of price various scenarios of price
The various changes. The various changes. The various changes. The various
scenarios of price changes scenarios of price changes scenarios of price changes scenarios of price changes
would be so computed so would be so computed so would be so computed so would be so computed so
as to cover a 99% VaR as to cover a 99% VaR as to cover a 99% VaR as to cover a 99% VaR
over a one day horizon. In over a one day horizon. In over a one day horizon. In over a one day horizon. In
order to achieve this, the order to achieve this, the order to achieve this, the order to achieve this, the
price scan range may price scan range shall be price scan range shall be price scan range shall be
initially be fixed at 3.5 fixed at 3.5 standard fixed at 3.5 standard fixed at 3.5 standard
standard deviation. The deviation. The initial margin deviation. The initial margin deviation. The initial margin
initial margin so computed so computed would be so computed would be so computed would be
would be subject subject to a minimum of subject to a minimum of subject to a minimum of
to a minimum of 1.75% on 2.80% on the first day of 3.20% on the first day of 4.50% on the first day of
the first day of currency trading and 2% thereafter. trading and 2% thereafter. trading and 2.30%
futures trading and 1 % The initial margin shall be The initial margin shall be thereafter. The initial
thereafter. The initial deducted from the deducted from the margin shall be deducted
margin shall be deducted liquid networth of the liquid networth of the from the liquid networth of
from the liquid networth of clearing member on an clearing member on an the clearing member on an
the clearing member on an online, real time basis. online, real time basis. online, real time basis.
online, real time basis.
CALENDAR SPREAD MARGIN
A currency futures position A currency futures position A currency futures position A currency futures position
at one maturity which is at one maturity which is at one maturity which is at one maturity which is
hedged by an offsetting hedged by an hedged by an hedged by an
position at a different offsetting position at a offsetting position at a offsetting position at a
maturity would be treated different maturity would be different maturity would be different maturity would be
as a calendar spread. The treated as a calendar treated as a calendar treated as a calendar
calendar spread margin spread. The calendar spread. The calendar spread. The calendar
shall be at a value of Rs. spread margin shall be at a spread margin shall be at a spread margin shall be at a
400 for a spread of 1 value of Rs. 700 for a value of Rs. 1500 for a value of Rs. 600 for a
month; Rs 500 for a spread spread of 1 month; Rs spread of 1 month; Rs 1800 spread of 1 month; Rs 1000
of 2 months, Rs 800 for a 1000 for a spread of 2 for a spread of 2 months for a spread of 2 months
spread of 3 months and Rs months and Rs 1500 for a and Rs 2000 for a and Rs 1500 for a
1,000 for a spread or 4 spread of 3 months or spread of 3 months or spread of 3 months or
months or more. The more. The benefit for a more. The benefit for a more. The benefit for a
benefit for a calendar calendar spread would calendar spread would calendar spread would
spread would continue till continue till expiry of the continue till expiry of the continue till expiry of the
expiry of the near month near month contract. near month contract. near month contract.
contract.
EXTREME LOSS MARGIN
Extreme loss margin of 1% Extreme loss margin of Extreme loss margin of Extreme loss margin of
on the mark to market 0.3% on the mark to market 0.5% on the mark to market 0.7% on the mark to market
value of the gross open value of the gross open value of the gross open value of the gross open
positions shall be deducted positions shall be deducted positions shall be deducted positions shall be deducted
from the liquid assets of the from the liquid assets of the from the liquid assets of the from the liquid assets of the
clearing member on an clearing member on an on clearing member on an on clearing member on an on
online, real time basis. line, real time basis. line, real time basis. line, real time basis.
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Annexure 2
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References:
2. Inputs from Sri Janakiraman R, a veteran currency dealer from a leading private
sector bank in UAE
3. SEBI Guidelines on Currency Futures-dated Aug. 6, 2008 and January 19, 2010
8. RBI Guidelines on Currency Futures-dated Aug. 6, 2008 and January 19, 2010
9. NSE guidelines dated 29.1.2010 on launching of trading in three new currency pairs
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