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Markets regulator Securities and Exchange Board of India today allowed exchanges to introduce currency futures in three more currencies -- euro, yen and pound.
According to estimates by market players, around 20 per cent of the currency trades in over the counter market is done in non-dollar currency. This means the move will increase volumes on the exchange platform manifold.
Currency futures contract specifies the price at which a specified currency can be bought or sold at a future date. Such contracts allow investors to hedge against foreign exchange risk. Since these contracts are marked-to-market daily, investors can, by closing out their position, exit from their obligation to buy or sell the currency prior to the contract's delivery date.
In a circular, the regulator said, "It has now been decided to permit eligible stock exchanges to introduce currency futures on euro-rupee, pound sterling-rupee and Japanese yen-rupee."
The market regulator has also decided to modify the calendar spread margin to be applied on the dollar-rupee contract. With the modalities of the contract announced by Sebi, the exchanges can now launch these new products as soon as they want.
The contract size for euro-rupee and pound-rupee would be 1000 euros and 1000 pounds, respectively. The contract size for yen-rupee, however, has been fixed at 1,00,000. All the new contracts would be quoted in rupee terms, while the outstanding positions would be in the respective foreign currency terms.
The maximum maturity of the contract would be 12 months, while all monthly maturities from 1 to 12 months would be made available. The contracts would be settled in cash in rupees. The client-level position limit has been capped at 6 per cent of the total open interest position.
Exchange-traded currency derivatives made their debut in India in August 2008 and since then have registered an impressive rise in volumes. The combined daily turnover on National Stock Exchange and MCX-SX has risen to over Rs 30,000 crore this month ($6.5 billion) from over Rs 2,000 crore (around $450 million) in January last year. Currently, only rupee-dollar futures are available for trading on exchanges.
The combined turnover of NSE and MCX-SX in the currency futures is more than what equity trading generates in the cash market. The combined turnover of the Bombay Stock Exchange and NSE in the cash segment stood at Rs 23,214 crore today, while the currency trading segment on MCX-SX and NSE generated Rs 34,482 crore turnover. On an average the equity derivative volume on NSE is Rs 50,000 crore.
Market participants, meanwhile, have welcomed this move saying that volumes would see a substantial jump in the near future. "This is a very big step in integrating the Indian market globally," said Forexserve Chief Executive Satyajit Kanjilal.
"With the new contracts, exchange-traded futures market would soon become parallel in size to the OTC market. It would also help many mid- and small-sized manufacturers to secure the right market rate and increase transparency," he added.
He sees the exchange-traded daily volume to be in excess of $10 billion soon. Globally, currency futures are one of the most actively traded derivatives contracts with gross market value of $2.47 trillion at the end of June 2009, according to Bank of International Settlement.
U Venkataraman, executive director, MCX Stock Exchange, said the introduction of new currency pairs would go a long way in helping market participants, especially international traders hedge against cross currency volatility and mitigate risk in export and imports across all major traded currencies.
In a related development, Sebi has clarified that 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 calendar spread margin shall be at a value of Rs 400 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," said the circular. The benefit for a calendar spread would continue till expiry of the near month contract, it added.
