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BUSINESS
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.
Readers can send their feedback at devajitmahanta@gmail.com
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