Mumbai: The exchange-traded currency
futures will now be expanded to the euro, pound and yen
pairing with the rupee, giving the investors more flexibility
to hedge their risks against volatility in exchange rates.
Currently, currency futures are allowed only in the
dollar-rupee contracts and analysts say the American
greenback will continue to be the dominant currency in this
market, and will only expand due to three more pairs.
Both the market regulator Sebi and banking watchdog
Reserve Bank today came out with separate circulars to permit
currency futures in three more pairs. It will be now up to the
stock exchanges to decide on the launch date.
"It has now been decided to permit eligible stock
exchanges to introduce currency futures on euro-INR (Indian
Rupee), pound sterling-INR and yen-INR," the Sebi said in a
circular today.
The Reserve Bank also said the bourses are permitted,
with immediate effect, to offer currency futures contracts in
the three pairs in addition to the US dollar-rupee contracts.
"Trading volumes are bound to go up. However, the
relevance and significance of the dollar-rupee contracts would
be multiple times more than all the other currency pairs put
together," pointed out SMC Capitals equity head Jagannadham
Thunuguntla.
Because of the global financial crisis, currency futures
traded on exchanges are considered much safer than those
traded in the open market. Currency futures refers to a
contract to exchange one currency for another at a specified
date and price.
Currently, the daily turnover in dollar-rupee futures
market is around USD 4 billion (about Rs 20,000 crore).
As per the Sebi guidelines, the trading in currency
futures will be from 9am to 5pm. The contract size will be
1,000 for the euro and pound, and 1,00,000 for the yen.
Contracts will be quoted in rupee terms but the outstanding
positions would be in foreign currencies.
The maximum maturity of the contract will be 12 months
but all monthly maturities will have to be made available.
The contract will be settled in cash and rupee and the
settlement price would be the RBI's reference rate on the date
of expiry.
The contract will expire on the last working day of the
month, excluding Saturdays.
The gross open positions of a client in all contracts can
go up to a maximum of six per cent of total such positions in
the market by all players or five million euros or pounds, or
200 million yens, whichever is higher.
"The idea is to prevent cornering of the entire currency
market by a cartel," Thunuguntla said.
A currency futures position at one maturity which is
hedged by an offsetting position at a different maturity would
be treated as a calendar spread, the Sebi said.
The calendar spread margin for dollar-rupee contract has
been set at Rs 400 (per lot) for a spread of one month, Rs 500
for a spread of two months, Rs 800 for a spread of three
months, and Rs 1,000 for a spread of four months or more.
The calendar spread margin has been brought in to take
care of the volatility risks resulting from arbitrage arising
from longer duration of the positions. Otherwise, the asset
price is neutralised in such a contract, say analysts.
Analysts also say the start of new currency pairs will
result in new trading strategies with cross-currency trading
and arbitrage. There will always be scope for arbitrage
arising from market mis-pricings, they point out.
In the country, the exchange-traded currency futures in
dollar-rupee was started by the National Stock Exchange on
August 29, 2008, and was later followed by the Bombay Stock
Exchange and privately-promoted MCX Stock Exchange (MCX-SX).
"The introduction of new currency pairs will go a long
way in helping market participants, especially international
traders, hedge against cross currency volatility and mitigate
risks in exports and imports across all major traded
currencies," said MCX-SX executive director U Venkataraman.
"The new currency pairs will add depth to the exchange
traded currency futures markets and help consolidate our
leadership position in this segment," he added.
In the initial days when currency futures was permitted
to be traded on stock exchanges, the market leadership was
held by the NSE with 70-75 per cent market share, followed by
MCX-SX with about 25 per cent, and BSE remained an
insignificant player.
However, over the period, the MCX-SX overtook NSE with 51
per cent market share pushing NSE into the second slot with 49
per cent share and the BSE is yet to make any presence felt in
this segment.
PTI
First Published: Tuesday, January 19, 2010, 20:49