Currency futures in india a way forward


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Currency futures in india a way forward

  1. 1. CURRENCY FUTURES IN INDIA – WAY FORWARD Dr. K. Sriharsha reddy Mrs. C. PrashanthiIntroductionIndia’s financial market has been increasingly integrating with the global marketsthrough increased trade and finance activity, giving rise to a need to permit a varietyof hedging instruments, other that OTC products, to manage exchange risk. Withelectronic trading and efficient risk management systems, exchange traded currencyfutures are expected to benefit corporates and individual investors exposed to foreignexchange risk. In this paper an attempt is made to enumerate significance of currencyfutures in hedging exchange rate risk and highlight trends in currency futures tradingin India.A Currency future is a forex derivatives contract to buy or sell one currency againstanother on a specified future date, at a price decided in the contract. Globally,currency futures market is one of the largest financial market with over $2 trillionturnover per day, largest over the counter market (OTC) with only 10% contributionfrom exchanges, largest trading centre being London, accounting for 30% of all tradesacross the globe and dominant trading currency is dollar accounting for 85% of thetrades in currency futures [(Bank of International Settlement(2009) and Wikipedia(2010)].Currency futures are considered to be most transparent, efficient andaccessible way to manage forex risk.Way2Wealth launchesCurrency Futures ServicesEvolution of Currency Futures in IndiaCurrency futures in India were launched on August 6th, 2008 following therecommendations made by Standing Technical Committee (2008) jointly constitutedby RBI and SEBI. This report laid down the framework for the launch of ExchangeTraded Currency Futures in terms of the eligibility norms for existing and newExchanges and their Clearing Corporations/Houses, eligibility criteria for members of 1
  2. 2. such Exchanges/Clearing Corporations/Houses, product design, risk managementmeasures, surveillance mechanism and other related issues. Persons resident in Indiaare permitted to participate in the currency futures market in India subject todirections contained in the Currency Futures (Reserve Bank) Directions, 2008.Standardized currency futures have the features such as, first, USD INR, EUR INR,JPY INR and GBP INR contracts are allowed to be traded. Second, the size of eachcontract is - USD 1000, EUR 1000, GDP 1000 and JPY 1,00,000. Third, the contractsshall be quoted and settled in Indian Rupees. Fourth, the maturity of the contractsshall not exceed 12 months. Fifth, the settlement price shall be the Reserve Bank’sReference Rate on the last trading day and sixth, the futures contracts are cash settledon maturity date.The membership of the currency futures market of a recognised stock exchange hasbeen mandated to be separate from the membership of the equity derivative segmentor the cash segment. Banks authorized by the Reserve Bank of India under section 10of the Foreign Exchange Management Act, 1999 as ‘AD Category - I bank’ arepermitted to become trading and clearing members of the currency futures market ofthe recognized stock exchanges, on their own account and on behalf of their clients,subject to fulfilling certain minimum prudential requirements pertaining to net worth,non-performing assets etc. NSE was the first exchange to have received an in-principle approval from SEBI for setting up currency derivative segment. Theexchange lunched its currency futures trading platform on 29th August, 2008. WhileBSE commenced trading in currency futures on 1st October, 2008, Multi-CommodityExchange of India (MCX) started trading in this product on 7th October, 2008.Currency futures in Indian markets benefitted investors to hedge against foreignexchange risk at affordable price with lower margins and small contract size.Currency futures are beneficial for retail investors with limited resources to takepositions. Contracts with daily Marking to Market (MTM) makes it easier forparticipants to account for P&L in books. Counter-party risk is eliminated as all tradesdone on recognized exchanges which are guaranteed by NSCCL (National SecuritiesClearing Corporation Ltd.). 2
  3. 3. Trends in Currency Futures Trading In IndiaThe Currency Derivatives Segment (CDS) on the NSE has witnessed high growthover the first ten months of introduction (September 08 to June 09). The volumes inthis segment have increased by 1200% in June 09 compared to September 08 levels.The average daily turnover on the NSE stood at Rs 34,256 mn in June 09 and openinterest was 267400 contract (or Rs 1285 mn) as at end June 09.Trading in Currency Futures segment commenced on August 29, 2008. On the veryfirst day of operations a total number of 65,798 contracts valued at Rs.291 crore weretraded on the Exchange. Since then trading activity in this segment has beenwitnessing a rapid growth. The total traded volume from August 2008 till March 2009was Rs.162,272 crore (US $ 31,849 million). Total number of contracts traded duringthe August 2008 to March 2009 were 32,672,768. The business growth of CurrencyFutures Segment is shown in Table 1 and Chart 1. Table 1: Business Growth of Currency Futures at NSE Month/ Year No. of Trading Trading Open Interest Contracts Value Value No. of Trading Trading Traded (Rs. Cr. (US $ mn) Contracts Value Value Traded (Rs.Cr.) (US $ mn) Sep-08 1,258,099 5,763 1,131 90,871 428 84 Oct 08 2,275,261 11,142 2,187 170,202 851 167 Nov 08 3,233,679 15,969 3,134 146,262 737 145 Dec 08 4,681,593 22,840 4,483 177,520 867 170 Jan 09 4,900,904 23,980 4,707 254,797 1,247 245 Feb 09 6,416,059 31,761 6,234 315,317 1,612 316 Mar 09 9,907,173 50,817 9,974 257,554 1,313 258 Aug 08 - Mar 09 32,672,76 162,27 31,849 257,554 1,313 258 8 2 3
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  9. 9. RNOVERbvnvghfcTURNOVERChart 7-1 : BusinessChartrrgergergergdgfbfngn business growth of currency futures inNSEChart 7-1 : Business Growth of Currevgrgncy Futures at NSE7-1 :Business Growth of Currency Futures at NSE 9