Exchange-traded currency futures set to make debut
In November last year, IT company Hexaware Technologies had made a provision for losses arising out of soured currency derivatives contracts. Reports about more such losses have been pouring in, compelling the money market regulator Reserve Bank of India to consider and introduce more transparent, exchange traded currency derivatives or futures.
According to the report, initially currency futures contracts on US dollar-Indian rupee would be permitted and the minimum contract size of the currency futures contract at the time of introduction would be $1000.
The size of the contract would be periodically aligned to ensure that the size of the contract remains close to the minimum size.
The report further specifies the trading hours, the tenor of the contract and settlement mechanism. The currency futures would expire on the last working day (excluding Saturdays) of the month.
The report also states that a robust risk management system needs to be in place since derivatives are leveraged instruments. Accordingly, the report has laid down a system that includes payment of an initial margin, calendar spread margin and, extreme loss margin (ELM).
The initial margin shall be based on a worst case loss of a portfolio of an individual client across various scenarios of price changes and shall be deducted from the liquid networth of the clearing member on a real time basis. ELM of one per cent on the mark to market value of the gross open positions shall be deducted from the liquid assets of clearing member. on a real time basis.
The report also specifies that the clearing member's networth must be at least Rs 50 lakh at all points in time. Mark to market gains and losses shall be settled in cash before the start of trading on T+1 day. Other salient features of the risk management system include collection of margin and enforcement by the exchange.
The Clearing Corporation of India shall continuously conduct backtesting of the margins collected vis-a-vis the actual price changes and submit a copy of the report to Sebi.
The report has placed the onus of surveillance and disclosures on the exchanges who will act as the first level regulators. Each client is assigned a client code which is unique across all members.
The report has specified client level, trading member level and clearing member level limits which would be applicable in the currency futures market. The exchanges should design surveillance systems that will meet the requirements specified by the joint committee.