Currency derivatives volumes plunge significantly on RBI exposure norms

The central bank deferred exposure rules implementation until May 3 amid investor concerns

The volumes of exchange-traded currency derivatives fell significantly in April as retail investors wound up their positions ahead of the central bank’s May 3 deadline on mandatory underlying exposure, market participants said.

The average daily turnover for currency futures and options in April on the National Stock Exchange (NSE) was at Rs 20,646 crore, down 87 per cent, from Rs 1.56 trillion in March. The average daily trading volume (ADTV) for the BSE slumped 75 per cent to Rs 1,481 crore, while that for Metropolitan Stock Exchange (MSE) was down 81 per cent to Rs 354 crore.

The Reserve Bank of India (RBI) had deferred the implementation of regulations for exchange-traded currency derivatives until May 3, following concerns by investors. Earlier, the norms were scheduled to take effect from April 5. Under the regulation, rupee-denominated currency contracts traded on the NSE and the BSE now require underlying exposure. Though traders are not required to provide evidence of underlying exposure for positions up to $100 million, they must confirm the existence of such exposure.

“Since April 4, the volume has fallen by around 70 per cent to 80 per cent, and the liquidity in the market has decreased. There won’t be any significant impact after May 3 (Friday) because all the positions have been wound up,” said Amit Pabari, managing director at CR Forex.

Transactions in currency futures were primarily driven by the retail segment which could not transact in Over-the-Counter (OTC) markets because banks demanded proof of underlying exposure, which they did not have. These retail trades accounted for more than 80 per cent of total transactions and contributed significantly to liquidity in exchange-traded currency futures. Initially, when currency futures trading began in August 2008, the RBI allowed transactions in dollar/rupee currency futures for hedging foreign exchange rate risks or other purposes.

“The volumes have dropped significantly because at least 80 per cent of the players were retailers. Now if the retailers are not there, then the corporates were hardly 3 or 4 per cent. And the rest were the banks and RBI to some extent. So, if there is no liquidity the RBI is obviously not going to come every day in the market. And if there is going to be no liquidity, then we are going to come and trade there,” said Anil Kumar Bhansali , Head of Treasury and Executive Director at Finrex Treasury Advisors LLP.