Banks gear up to trade in currency futures on Friday

Banks, which had taken membership to trade in currency futures on the National Stock Exchange, are trying to complete all formalities before the launch on Friday.

State Bank of India, ICICI Bank, Axis Bank and Union Bank have already taken membership to trade on NSE, the first exchange to launch currency derivatives.

A currency future is a forex derivatives contract to buy or sell one currency against the other on a specified future date, at a price decided in the contract. Market experts said the contours of the currency market will change once trading begins. On their part, banks are expecting lower volumes initially as they are yet to master the software systems and risk management for this segment.

Axis Bank has received the requisite approvals from NSE and the Securities & Exchange Board of India (Sebi). Union Bank has got NSE approval for trading and clearing, but is awaiting a green signal from Sebi.

An executive said that during the first fortnight it expects only proprietary trading. Initially, the bank will have only a single terminal and will roll out a pan-India programme later. Others such as Bank of Baroda will apply to NSE next month.

An SBI executive associated with the activity said forex derivatives are a transparent tool to help clients manage their risks better. The executive said that the clients will have to pay the margins upfront. Also, depending on the trend of the trading, they may have to chip in with additional margins.

Contracts will be offered for a month, so those expecting delivery in the middle of the month may run the risk of keeping their position open for 14-16 days.

A treasury executive at a public sector bank said individuals and small and medium enterprises will prefer to look for exchange-traded currency derivatives, while larger companies may continue to find benefit in the over-the-counter (OTC) platform.

He said that since banks are already active in the OTC market, the experience is bound to help. Stock brokers, who will also offer currency derivatives trading, will have an edge as they already have a client base that is active in equity derivatives, a banker said.

Foreign Exchange Dealers Association of India (FEDAI) and NSE have provided training to the members, including banks and brokerages to educate them about the risks involved and the margin collection. Mock trading sessions for currency derivatives started from August 20 and more than 300 members have participated so far. A FEDAI functionary said exchanges have declared that they will not levy security transaction tax (STT) at the moment.