Currency derivatives: Exchanges seek longer trading hours

The National Stock Exchange (NSE) and the Multi-Commodity Exchange stock exchange (MCX-SX) have approached the Securities and Exchange Board of India (Sebi) with proposals to deepen the currency derivatives market. The proposals include increasing the number of trading hours, allowing a bigger lot size and trading in other currencies like euro, yen and pound.

While the NSE spokesperson could not be reached, MCX-SX Chief Executive Officer U Venkatraman said, “We have shared these proposals from the market participants with Sebi.”

Stock exchanges have proposed to increase the open market trading hours on the forex desk till 11:30 pm from 4:30 pm at present. The idea is to address concerns of various market participants, who believe that the trading hours should be extended to align the Indian currency market with the US and European markets that trade till late in the evening.

Since the cash settlement prices, which form the basis of physical prices of base metals, are decided late in the evening in the West, restrictive timings prevent efficient hedging and useful price discovery on the Indian bourses.

Saurabh Jain, commodity head at Kanpur-based Golden Share and Stock Brokers, which also acts as a member in currency derivatives trading, said, “The trading hours should be at par with the commodities trading sessions. This would reduce the cost of hedging and chances of manipulation. Also, the influence of price movements in gold, silver, and crude oil will be absorbed by the Indian rupee without a time-lag, to help improve price discovery.”

Sources said that Sebi was also considering the proposal to increase the lot size of currency derivative contracts. Market players, especially bankers, feel that larger contract lots of $1 million should also be introduced apart from the present $1,000 contracts.

“Small contract lots make the process of hedging large cross-currency exposures of banks cumbersome,” said the head of trading at a large private sector bank.

Banks would also prefer to undertake currency derivative deals in the over-the-counter (OTC) market where margin requirements are less stringent. “Too many margin obligations keep bankers away from trading these instruments on the exchanges,” said an Axis Bank official.

At present, only standardised US dollar–Indian rupee contracts are allowed for trading on the exchanges. The regulators, Sebi and RBI, had earlier said that a euro-rupee contract would be introduced after a period of six months.

At present, about 531 members are registered with Sebi for currency derivatives trading. The combined average daily turnover in these instruments stands at about Rs 7,000 crore.

Further, a proposal to allow trading in other currencies like the euro, pound and yen has also been submitted to the regulator in order to strengthen the hedging process.

Over the past six months, currencies such as euro and yen have displayed a higher stability vis-à-vis the US dollar. Allowing futures trading in them would allow participants to hedge their exposures.