After kick-starting mock-trading for currency futures, the National Stock Exchange will launch currency derivatives on August 29. NSE will be the first exchange to launch currency futures after receiving an in-principle approval from the Securities and Exchange Board of India.
This will be for the first time that even retail investors with no exposure to foreign exchange will be able to take a call on the rupee's movement with dollar. All these years, trading in foreign exchange was allowed only for banks and companies having currency exposure.
Currency futures are standardised foreign exchange contracts traded on an exchange to buy or sell one currency against another on a specified future date. The contracts will be traded and settled in Indian rupees and there will be 12 monthly contracts.
Each contract will be worth $1,000 and the near-month contract will trade till 12 noon on the second day prior to the last business day in the month. The contracts will be traded online through the order-driven market mechanism, quite similar to equity derivatives. Trading in currency futures will take place between 9 am and 5 pm.
A daily mark-to-market settlement will be based on the futures closing price and will be done on a T+1 basis. The final settlement will be on the last business day of the month and will be based on RBI's reference rate on the last trading day. NSCCL will be the clearing corporation, responsible for clearing, settling and managing risks in the currency futures segment. NSE has conducted around 15 roadshows across the country.
In India, there is an active OTC (over-the-counter) market for forwards with an average daily turnover of $34 billion. Currently, only Indian investors are allowed to trade in currency derivatives, while NRIs and FIIs are not permitted.
Banks have been allowed to become members of this segment on the exchange. An exchange-traded market for currency derivatives provides a hedge against currency risks for different kinds of participants.
The networth requirement for a trading membership in currency futures at NSE is Rs 1 crore (Rs 10 million) and for a trading-cum-clearing membership, it is Rs 10 crore (Rs 100 million). Top NSE executives said about 80 per cent of its 1,000-odd members have shown interest in offering currency futures to their clients. Besides, a large number of banks and corporate entities have also shown interest in exchange-traded currency futures, an executive said.
NSE has still not figured out about the possible volume of business that will take place on the new platform. But the exchange is expecting large volumes, according to an executive.
When asked whether the business done on the OTC market would shift to the exchange, the executive said both would co-exist.
The permission given by RBI and Sebi to allow trading in currency futures is a part of the government's move towards capital account liberalisation, the NSE executives said.
