Sebi tightens currency derivative rules to tame volatile rupee

With an aim to help in government efforts to stem falling rupee, Sebi has tightened the exposure norms for currency derivatives to check large scale speculative activity in the market.

The decision, taken yesterday, came after consultations with banking regulator RBI. Securities and Exchange Board of India (Sebi) keeps a tab on capital market, including trading in currency derivatives.

Following Sebi's move, the National Stock Exchange today revised the position limits as well as margin requirements for exchange traded currency derivatives.

Currency derivative trading allows traders and investors to take forward views on various currency pairs, including rupee-dollar. In recent times, there have been apprehensions that large-scale speculations on currency pairs is adding to the downward pressure on the rupee, which yesterday fell to a new low of 61.21 against the US dollar.

Today, it recovered to 60.14 after the regulators unleashed a slew of steps to curb speculative trades.

In a circular late on Monday, Sebi said it was reducing exposure that brokers and their clients can take on currency derivatives and also doubled their margins on dollar-rupee contracts.

The market regulator said the move has been initiated in in the view of recent turbulent phase of extreme volatility in USD-INR exchange rate.

The exposure to all currency contracts for a broker has been capped at 15% of their overall exposure or $50 million, whichever is lower.

For clients, this cap would be 6%, or $10 million, whichever is lower.

The current exposure limits for brokers and clients are the higher amounts of 15% of their overall exposure or $50 million, and 6% or $10 million, respectively.

The changes would be effective from July 11.

Meanwhile, NSE in a circular today said the initial margin requirement for UDS-INR futures and options contracts would be "two times" the current requirement.

For such future contracts, the extreme loss margin has been increased to 2% of gross open position value from existing 1.5%.

In the case of options contracts, the same has been hiked to 3% from 1.5%.

For banks, which are trading members, the position limit would remain at "15% of total open interest or $10 million whichever is lower". Earlier, the higher value between the two was the limit.

Meanwhile, RBI has barred authorised dealer banks from trading in currency derivatives on their own. They will, however, be allowed to trade on behalf of their clients.