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Currency futures: A significant event in Indian market
By Devajit Mahanta
 On August 29 Union Finance Minister P Chidambaram launched the first Currency Futures Trading in the country at the National Stock Exchange (NSE). Besides NSE, country’s largest commodity bourse the Multi Commodity exchange of India (MCX) and Bombay Stock Exchange (BSE) have received approval from Security Exchange Board of India (SEBI) to launch currency futures. The launch of currency derivatives in India follows the recommendations made jointly by the Securities and Exchange Board of India and the Reserve Bank of India in May this year.

The currency futures market, also referred to as the ‘Forex’ or ‘FX’ market is the largest financial market in the world, with a daily average turnover of US$1.9 trillion – 30 times larger than the combined volume of all U.S. equity markets.

A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial centre, first to Tokyo, London, and New York. Indian currency futures contracts would be quoted and settled in Indian rupee and the maturity of the contracts would not exceed 12 months. The futures date and price will be fixed on the purchase date. Only US dollar-Indian rupee contracts would be allowed and the contract size will be of 1,000 US dollars and the tick size (minimum price fluctuation) will be 0.25 paisa. The trading member for the proposed currency derivatives exchange 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. On the other hand, one should not forget that the Dubai exchange introduced a USD: INR currency futures contract in the middle of 2007 but volumes have not really picked up, belying expectation based on the fact that there is a significant commercial interest in the rupee because of exposures to the diamond and gold trade.

Speaking of the ‘limited scale’, only US dollar-rupee contract (with a size of $1,000 each) is allowed now; also the trading will take place only on the platform for this exclusive purpose created by the National Stock Exchange. Uncertainties still loom large among traders and brokers as they look forward to India’s largest commodity exchange, Multi Commodity Exchange of India Limited (MCX) after SEBI gave its approval to the bourse to start Currency Futures trading. MCX as a commodity exchange falls under the regulator FMC (Forwards market Commission) whereas currency futures are regulated by SEBI (Securities and Exchange Board of India). The Government of India has not clarified as to which regulator will play an anchor role for currency derivative trading. If all the three regulators RBI the Forex market regulator, SEBI which oversees the capital market and FMC which regulates the commodity futures market – intervene without proper interaction between them, the growth of currency futures market could be seriously undermined. In most of the countries, where currency futures have really flourished, the trading takes place on multiple commodity exchanges, rather than stock exchanges.

Besides, since foreign operators – NRIs, FIIs etc. – are barred from participating, the new exchange means the contract can be traded only within India and that too, without involving any outflow of funds. The global markets (mainly USA) become active only after Indian markets close at 5.00 pm and as a result there is an evident fear about the risks associated with overnight fluctuations in the currency pair. Once the Indian markets close, the positions cannot be reversed by the traders till the next day. The tax treatment of the gains/losses in the futures currency market would this be treated as business income as in the case of equity derivatives also not make it clear by the regulator?

The currency futures market will have greater price transparency for the end-user. In fact, it has done a commendable job to consider both stock and commodity exchanges for launching currency futures contracts. Stock exchange will enable their large network of clients, traders, jobbers, arbitrators and speculators to trade in currency derivatives; the commodity exchange MCX will enable the hedgers, namely importers and exporters, who have genuine hedging needs for protection against bank rate fluctuation.

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