Rupee trading to get a boost in Singapore

The Singapore Exchange (SGX) on Wednesday announced it would start clearing of non-deliverable forwards (NDF) of Asian currencies traded in the region by this September.

The foreign exchange (FX) forwards will include non-deliverable currencies such as the Indian rupee, Chinese yuan, Indonesian rupiah, Korean won, Malaysian ringgit, Philippine peso and Taiwanese dollar, SGX said. “Asia is the world’s fastest-growing region and this service will benefit our members as they grow their businesses here,” SGX chief executive officer Magnus Bocker said.

SGX, as a result, will become the first exchange to take on counter-party risk. This is the risk to each party of a contract, guaranteed by the clearing member in most cases, in case one of the parties in the contract defaults. “A world’s first, this initiative is aligned with recent global regulations on mandatory clearing for non-deliverable FX forwards and FX options via a central counter party,” the release said.

NDFs are forward transactions used to hedge non-convertible currencies. The contract is for a fixed amount, on a specific due date and at an agreed forward rate. These are usually settled in US dollars.

The move could increase trader confidence in the NDF market, which otherwise has been criticised by regulators around the world, as it increases vulnerability and risk for a nation’s currency.

Saurav Arora, President at United Stock Exchange and Joseph Massey, managing director and chief executive officer at MCX-SX, two domestic currency exchanges, said the SGX move would see the turnover in rupee-dollar contracts witness a substantial jump in Singapore. But will it affect the domestic volumes? In the long run, the move could stem the pace of growth of currency trading in India as cheap options like these are being made available for traders offshore, say other brokers.

The vibrant NDF market dates back to the 1990s. It was a response from foreign banks and brokers to restrictions related to onshore currency forward contracts by many governments. The market serves hedge funds, multinationals taking the participatory note route to buy stocks and entities interested in speculating on India but which cannot take rupee exposure directly. The banks normally post their quotes on the Association of Banks in Singapore’s fixing page. This new service comes less than a year after SGX launched the clearing of interest rate swaps denominated in Singapore dollars. According to the release, the exchange has cleared nearly $80 billion of interest rate swaps since the launch last November.

"The recent move by SGX will see Indian rupee trades soar. The only option is to stretch the domestic trade timings and align it Singapore. Traders are increasingly seeking ways to trade in Singapore when they need to hedge their risks in case of emergency or arbitrage opportunity," said Massey.

SGX has been targeting the Indian equity markets by attracting more traders for S&P CNX Nifty futures on its platform and it has taken several recent initiatives to reduce transaction costs.

Although Hong Kong and London are other NDF centres for trading the rupee, Singapore is the most active, where roughly $50 billion worth of average daily turnover is reported in the dollar-rupee contract. According to a December 2010 report by the Bank for International Settlements, the average daily turnover on the dollar-rupee pair was $42.7 billion. "The SGX move will raise currency trading in Singapore, as participants are more interested in products where exchanges are clearing members," said Arora.