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RBI mulls currency futures exchange

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Foreign institutional investors unlikely to get a look-in.
 
The (RBI) is exploring a dedicated currency futures exchange, after taking an in-principle decision to launch rupee-denominated futures.
 
In its meeting with market participants in Juyly, the RBI has also decided to revive interest rate futures which have failed to take off after being introduced in June 2003.
 
The central bank is not in favour of currency futures being traded on stock or commodity exchanges as they are regulated by the and Forward Markets Commission (FMC), respectively.
 
This could dilute RBI's regulatory power on domestic foreign exchange market which, in turn, could have implications on exchange rate management "" RBI's sole prerogative.
 
Moreover, the discussion also highlighted the legal issues if futures are allowed on commodity exchange as it happens internationally or on stock exchanges like NSE or BSE.
 
This is because, commodity exchanges are governed by Forward contract Regulations act and stock exchanges are regulated by the Securities and contract regulations Act. Currency futures are not explicitly defined in any of these Acts.
 
Meanwhile, Sebi has also discussed the issue of currency futures with market participants at its derivatives market committee meeting last week.
 
Banks, at the meeting, suggested co-existence of over the counter (OTC) and exchange-traded market for currency and interest rates futures so as to involve greater retail participation.
 
While the exchange can take care of trading of large lots, smaller lots with underlying can be traded in the OTC market with banks as the intermediary.
 
A RBI panel also favoured that unlike OTC currency market in India, it could relax the requirement of underlying for futures trading to enhance liquidity.
 
In the discussion paper to be submitted on currency futures next month, the central bank is of the view that banks, brokers and other fixed income traders and retail participants could be allowed to participate in futures trading.
 
It has, however, expressed reservations in allowing foreign institutional investors since they do not hedge a major part of their portfolio. The currency futures position will be settled in rupee.
 
The central bank may, however, restrict itself from trading in the futures unlike its active intervention in the interbank spot and forward market to control the rupee dollar exchange rate. This, it feels may reduce the manipulation of exchange rate since it is the sole authority for managing it.
 
There may be limits prescribed for individuals, banks and traders for taking position in the futures market so as to check the impact of futures trading on the exchange rate.
 
Since the RBI is considering relaxing the requirement of an underlying for futures trading to enhance liquidity. Margin requirements will also be prescribed for banks on behalf of retail or institutional participants.
 
At the same time, this has triggered the issue of relaxing the requirement of underlying for the spot and forward foreign exchange market. Under the current norms of FEMA, no trade in spot or forward exchange market can happen without an underlying.
 
An underlying is either a financial instrument or commodity and the prices or interest rates on such instruments provide the basis on which a view is taken in the futures market.
 
MONEY MATTERS
 
  • The central bank is not in favour of currency futures being traded on stock or commodity exchanges as they are regulated by the Sebi and FMC, respectively
  • This could dilute RBI's regulatory power on domestic foreign exchange market which, in turn, could have implications on exchange rate management - RBI's sole prerogative
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