NSE plans to launch quanto cross-currency derivatives, seeks RBI approval

Move could help revive exchange-traded currency volumes

The National Stock Exchange (NSE) is planning to launch quanto cross-currency derivatives or quanto derivatives — and has sought approval from the Reserve Bank of India (RBI) for the same, according to the draft red herring prospectus (DRHP) filed with the Securities and Exchange Board of India (Sebi) for its initial public offering (IPO).

 

A quanto derivative is a financial contract that enables investors to take exposure to the exchange rate between two foreign currencies, such as the euro against the US dollar or the UK pound sterling against the dollar, without directly assuming exchange rate risk in the settlement currency.

 

It tracks the movement of a foreign currency pair, while profits and losses are settled in a pre-determined currency under a fixed conversion mechanism.

 

“These contracts are termed as ‘quantity adjusted’. This can become a good opportunity for investors abroad to take a call in our markets because they will be able to fix currency rates and they do not have to carry any risk on that. Risk removal in these derivatives is the greatest asset in this kind of investment. Since there is a predetermined exchange rate, one doesn’t have to worry whether the rupee moves up or down,” according to Uday Tardalkar, a senior financial services sector professional who is chairman and independent director of listed holding company Rose Merc. 

 

Responding to email queries by Business Standard, the NSE said, “The company has filed a DRHP with Sebi. We are unable to provide further comments at this stage.”

 

The exchange is also awaiting approval from the markets regulator for several other products, such as thermal coal (Platts) futures in the commodity derivatives segment and interest rate derivatives on the corporate bond index.

 

Mrugank Paranjape, managing partner, MCQube and former MD & CEO of Multi-Commodity Exchange (MCX) noted that getting contracts which can be used for hedging is a welcome move.

 

“In our country, there is a lack of information or apathy towards hedging currency and commodity risks. Even if people are interested in it, there is a lack of such products. Exchanges, which also are for public utility, have to think about businesses where there may not be an immediate short-term success or benefit and it’s good to see such products coming up,” he added.

 

Market participants say products such as quanto derivatives would allow investors to trade global currency pairs through regulated domestic platforms. They could also help to revive exchange-traded currency volumes by expanding the range of available contracts beyond rupee-based pairs.

 

It is noteworthy that the application comes at a time when volumes in currency derivatives fell sharply since April 2024 — when the RBI mandated underlying contracted exposure to foreign currency to participate in the currency derivatives segment.

 

The RBI mandate implied that exchange-traded rupee derivative transactions could only be utilised for hedging purposes with proof of exposure.

 

This led to a sharp fall in the average daily turnover volume (ADTV) in currency derivatives on NSE, with volumes dropping from ₹33,165 crore in March 2024 to ₹12,100 crore and ₹5,258 crore in April and May 2024.

 

In subsequent months, the turnover dropped even further. The ADTV for currency derivatives in June 2026 stood at around ₹5,000 crore.

 

In contrast, trades on the BSE in currency derivatives have dried up completely, showing zero turnover since January 2025.

 

“There has been a discussion in the market for the past six months that exchanges should be allowed to offer cross-currency derivatives in non-rupee currency pairs such as euro-dollar, pound-dollar and dollar-yen,” said a market participant.

 

“The market believes that allowing cross-currency derivatives beyond the rupee could help revive trading activity on exchanges,” said a foreign exchange dealer at a state-owned bank.

 

“The idea is that offering such products on regulated exchanges could help attract trading activity that currently takes place outside the exchange ecosystem, especially after volumes in rupee currency derivatives declined following regulatory changes,” said a senior executive at a brokerage firm.