Sebi for options, delivery-based settlement in currency futures

The Securities and Exchange Board of India (Sebi) is planning to broad-base the exchange-traded currency futures market by allowing currency options, delivery-based settlement and futures contracts in more currencies. Currently, these facilities are available only in the over the counter (OTC) market, where client-to-banks and banks-to-banks currency derivative deals take place on bilateral basis.

In India, dollar-rupee futures were launched on August 29 this year. Now, a daily trading of $250-300 million is taking place on three exchanges — NSE, BSE and MCX-SX. NMCE has already said that it would start currency futures once it received approval from Sebi. There are also reports that a consortium of banks is planning to set up an exchange for currency futures, though it has not applied to Sebi yet.

There is certainly no space for so many exchanges if only dollar-rupee futures are to be traded, says a source. Sebi’s move to replicate the “freedom” of OTC currency market to exchange-traded futures will certainly deepen and widen the market.

Sebi Chairman C B Bhave also raised this issue on Tuesday. “Exchange-traded currency futures were started around three months ago. Three exchanges were allowed, of which two are active. These markets were started with hands and legs tied, but they have grown,” he said while speaking at the 4th Annual Indian Securities Forum in Mumbai.

“Our intention is to go to the joint Sebi-RBI committee on currency futures and tell them that we need the exchange-traded market to have the same kind of freedom as the OTC market,” he added.

Currently, options on currency are traded on a bilateral basis in the OTC market. Experts say that options may be introduced in the exchange-traded currency derivatives market. Options are also the cheapest hedging instruments since the buyer of the option only has to pay the premium. If this instrument is brought to exchanges, it would bring in transparency.

“Bringing OTC instruments to exchanges would mean market participants don’t have to worry about counter-party risks,” said Bhave.

The other thing that the regulator could do is to usher in delivery-based settlement in currency futures. Currently, this provision is there in commodity futures, but this is vital for the growth of currency derivatives in India. This will broad-base participation in the rupee futures market since delivery-based settlement will be more beneficial to retail investors, who wish to hedge their exposure to currency risk.

For instance, the dollar is quoted at Rs 48.50 and banks will sell it to the customer at Rs 49.40. If the customer wants to sell it to banks, s/he will get a rate of Rs 47.70. Now, the problem is currency futures are settled in cash and no delivery takes place. So, the customer can only get rates and not dollars.

At present, the Foreign Exchange Management Act (Fema) doesn’t permit options contracts and delivery-based settlement in exchange-traded currency futures. RBI will have to amend Fema to introduce these instruments.

The market regulator is also considering allowing futures in more currencies as well as participation of NRIs and FIIs.