Currency Futures in India-UPDATE-NSE & MCX-SX To Launch Trading in 3 New Pairs EUR, GBP & JPY-VRK100-22012010

By Rama Krishna Vadlamudi January 30, 2010
CONTENTS
PAGE
1 Traded volumes on all exchanges 3
2 No. of contracts traded on all exchanges 4
3 Month-end open interest 5
4 Spat between NSE and MCX-SX 6
5 Success rate of currency futures in India 7
6 Preamble to currency futures 8
7 Definition of currency futures 9
8 Basic aspects of currency futures 9
9 RBI’s eligibility criteria for Banks 10
10 Old versus New market (Forwards vs futures) 10
11 Eligibility criteria for dealing in currency futures 11
12 Mechanism involved 11
13 Benefits of currency futures 12
14 Their limitations 12
15 SEBI’s rule on open position limits 13
16 Impact of currency futures 13
Annexure 1 (initial, calendar spread & extreme loss margins) 15
Annexure 2 (SEBI’s position limits for four currency pairs) 16
References 17
Abbreviations used:
NSE : National Stock Exchange BSE : Bombay Stock Exchange
MCX-SX : MCX Stock Exchange RBI : Reserve Bank of India
FII : Foreign Institutional Investor NRI : Non Resident Indian
USD : US Dollar EUR : Euro
INR : Indian Rupee GBP : Pound Sterling
JPY : Japanese Yen
SEBI : Securities and Exchange Board of India
NCFM : NSE’s Certification in Financial Makets
NISM : National Institute of Securities Market
Rama Krishna Vadlamudi, BOMBAY January 30, 2010
www.scribd.com/vrk100 vrk_100@yahoo.co.in
MY BLOG: www.ramakrishnavadlamudi.blogspot.com
It is almost one and a half years since the introduction of currency futures under
the currency derivatives segment of Indian stock exchanges. The volumes have
increased tremendously on NSE and its arch rival MCX-SX, the two dominant
exchanges of trading in currency futures; while on BSE practically there have
been no volumes in the last six months or so. Trading in currency futures had
started by NSE on August 29, 2008. This article examines the volumes traded on
these and explains the basics of currency futures in a comprehensive manner.
NSE and MCX Stock Exchange are launching futures trading in three new
currency pairs, namely, EUR-INR, GBP-INR and JPY-INR on February 1, 2010
following the decision of RBI to introduce the additional pairs. RBI and SEBI had
issued their guidelines for these three pairs on January 19, 2010.
RBI’s decision to introduce more currency pairs for currency futures
trading is welcomed by the industry:
In its second quarter review of Annual Policy (Monetary Policy) released on

October 27th, 2009; Reserve Bank of India had proposed to permit the three
recognized stock exchanges to trade currency futures in three more currency
pairs namely, Euro-Indian Rupee, Pound Sterling-INR and Japanese Yen-INR; in
addition to US Dollar-INR which has already been permitted since the
introduction of currency futures in August 2008. On January 19, 2010, RBI and
SEBI came out with guidelines for introducing these three new currency pairs.
The size of the contract would be Euro 1,000; GBP 1,000 and JPY 1,00,000 for
Euro, GBP and JPY respectively.
The introduction of these new currency pairs has been anticipated for some time
by the industry. Now, that the RBI at last is permitting more currency pairs in
currency futures, this is good news for the industry.
STATUS CHECK ON CURRENCY FUTURES IN INDIA:

As of now, the combined average daily turnover of the currency futures contracts
in all the three exchanges increased from USD 1.1 billion in March 2009 to 2.5
billion in September 2009 – which means a growth of more than 125 per cent in
just six months period. These developments are very good from the market point
of view. More volumes result in better price discovery and more opportunities for
traders, investors, genuine hedgers, speculators and arbitrageurs.
Let me first walk you through some number crunching:
(It may be noted that the volumes, no. of contracts, o/s open interest and other figures given in
the following pages pertain to only currency futures as relate to USD-INR currency pair. Till
January 18, 2010; only trading of currency futures in the US Dollar-Indian Rupee pair on three
recognized stock exchanges were allowed by Reserve Bank of India.)
Page 2 of 17
1. TRADED VOLUMES OF ALL EXCHANGES
Total Traded value-all exchanges (Rs crore)
2 00 000
1 84 813
1 80 000
1 60 000
1 43 348
1 40 000
1 24 900
1 20 000
99 464
1 00 000
80 000 77 244
63 963
60 000
45 805 48 404
40 000
31 140
20 000 17 429
5 763
291
Aug.08 Sep.08 Oct.08 Nov.08 Dec.08 Jan.09 Feb.09 Mar.09 Apr.09 May.09 Jun.09 Jul.09
Table 1: Traded volumes on all exchanges for USD-INR pair (Data: SEBI)
As can be seen from the above table, the trading volumes on these exchange-
traded currency futures have risen tremendously in the last one year. Let us take
note of the volume increase between December 2008 and July 2009. The
volumes have surged by four times during that period from Rs 0.46 lakh crore to
about Rs 1.85 lakh crore. The cumulative volume between August 2008 and July
2009 works out to Rs 8.50 lakh crore (Latest data available is up to July 2009).
During FY 2008-09, total traded volume was only Rs 869 crore on BSE;
practically this exchange is out of the currency futures market. In the last six
months of the current financial year, there are practically no volumes on BSE.
Page 3 of 17
2. NUMBER OF CONTRACTS TRADED ON ALL EXCHANGES
Total No. of contracts traded-all exchanges (No. in lakh)
380.77
400.00
350.00
299.22
300.00
257.36
250.00
193.89
200.00
153.99
129.18
150.00
93.89 98.93
100.00
63.00
35.57
50.00
12.58
.66
.00
Aug.08 Sep.08 Oct.08 Nov .08 Dec.08 Jan.09 Feb.09 Mar.09 Apr.09 May .09 Jun.09 Jul.09
Table 2: Number of contracts traded for USD-INR pair only (Data: SEBI)
Total number of contracts have grown from 94 lakh in December 2008 to 380
lakh in July 2009, a dramatic increase of four times in just seven months. All
these trading volumes are happening in just two exchanges, NSE and MCX-SX.
The cumulative number of contracts works out to 1,720 lakh between August
2008 and July 2009. Some more exchanges are waiting in the wings to introduce
currency futures. Trading may start in the next few months in another new stock
exchange, namely United Stock Exchange of India.
Page 4 of 17
3. MONTH-END OPEN INTEREST
Month-end Open interest-all exchanges (Rs in crore)
3 500
3 196
3 000
2 660
2 416 2 491
2 500 2 303
2 216
Rs crore
2 000
1 571
1 449
1 500
1 153
1 019
1 000
428
500
72
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Table 3: Month-end open interest for USD-INR pair only (Data: SEBI)
The month-end interest used was in the order of Rs 2,300 crore at the end of
March 2009. By July 2009, it has reached Rs 3,200 crore. Compared to the
traded volumes on the exchange, there has been no dramatic increase in the
open interest at month-ends.
Now, the rupee has suddenly started appreciating dramatically in the first week of
October 2009, it would be interesting to watch how things are being panned out
in the currency futures market. Obviously, volumes will grow up by several folds
during the current month as more speculators and players may be attracted
towards the currency futures. Between the end of Sept. 09 and beginning of
Oct.09, Rupee has appreciated by 150 paise or about three per cent against the
US dollar. Such a large movement in the exchange rate is quite unusual.
Page 5 of 17
4. THE SPAT BETWEEN NSE AND MCX-SX
Total Market Share (Traded value) %
MCX-SX
NSE
48%
52%
Table 3: Market Share between NSE and MCX-SX (Data: SEBI)
Both the NSE and MCX-SX are snapping at each other heels since the beginning
of trading in currency futures last year. Trading in currency derivatives started on
August 29, 2008 at NSE; on October 1, 2008 at BSE and on October 7, 2008 at
MCX-SX. Last year, MCX-SX's total traded volumes were higher than that of
NSE during the months of December 2008, January 2009 and February 2009.
Except in these three months, NSE has a slight edge in terms of total traded
volumes.
During the financial year 2008-09, NSE's market share was 52%, whereas MCX-
SX's market share was 48%. The same situation continued during the first four
months of the current financial year.
It would be interesting to watch who will be the ultimate winner in the race for the
number one position. As more stock exchanges are likely to enter the fray, the
battle would keep these exchanges on their tenterhooks. And the competition
may prove to be good for the market participants.
Page 6 of 17
5. SUCCESS RATE OF THE CURRENCY FUTURES
If one goes by the spectacular rise in volumes traded on the stock exchanges,
one can argue that the introduction of currency futures has been a success.
However, volumes alone may not be sufficient to judge the success of this new
derivative product in India. Other criteria could be the depth of the markets,
participation from the various kinds of investors, corporates, and other
stakeholders of the market.
Still there are some creases to be ironed out with regard to Currency Futures.
FIIs and NRIs are still not allowed; even after the new product has been
introduced more than a year back. As stated in the first page of this document,
RBI has now only permitted three more currency pairs – Euro-INR, Japanese
Yen-INR and Pound Sterling-INR also, in addition to US Dollar-INR which was
already permitted. It remains to be seen how these three pairs would perform.
If one compares the daily volume of more than USD 40 billion on the OTC
market, the daily volume of less than USD 2.50 billion on the exchange-traded
currency futures is small. But, over a period of time, with increased participation
and more currencies, the currency futures may become a force to reckon with on
their own – the dominance of exchange-traded derivatives is the norm in
international markets.
SEBI REPORT FOR JANUARY-MARCH 2009 QUARTER:
The average share of the top ten members in terms of turnover was 56%
for NSE & 63% for MCX-SX for the quarter ended March 2009
There were 353 members at NSE and 327 members at MCX-SX who did
Rs.10 crore or more of turnover during January- March 2009
The percentage share of Retail Participants in turnover was 41% at NSE,

and 29% at MCX-SX during January-March 2009
Under proprietary trading, the share of banks was about 14 per cent on
NSE and 10 per cent on MCX-SX and the share of non-banks was 45 per
cent on NSE and 61 per cent on MCX-SX
One the client side, banks, insurance companies, mutual funds and other
institutions have not got any transactions on behalf of the clients.
Page 7 of 17
Till now, we have analysed the practical working of currency futures

market in India for a one-year period. The following pages will explain
the readers about the background to the introduction of this new
derivative product, their basic aspects, mechanism involved and the
benefits of currency futures to market participants. Let me start with
the background to the new instrument which tasted some success in
the last 18 months. (Basics given below are aimed at the general reader)
6. PREAMBLE TO CURRENCY FUTURES
Both RBI and SEBI had jointly constituted a standing technical committee to
evolve a framework for the introduction of exchange-traded currency derivatives
market in India. The committee submitted its report on May 29, 2008. In a long-
awaited move, RBI and SEBI had on August 6th, 2008, disclosed a roadmap for
introducing exchange-traded currency derivatives trading in India. As part of the
continuing economic reforms in India, both regulators have set out guidelines for
stock exchanges as well as banks.
Further, RBI and SEBI came out with their final guidelines on August 6, 2008 for
launching exchange-traded currency futures. In addition to NSE, other
exchanges, like, BSE and MCX, have also introduced trading in currency futures.
A new stock exchange, United Stock Exchange of India, is also expected to start
trading in the next few months.
With effect from January 19, 2010, RBI has permitted currency futures trading in
three more currency pairs, namely, EUR-INR, GBP-INR and JPY-INR; in addition
to USD-INR pair. As per the guidelines dated January 19, 2010, from RBI and
SEBI; NSE and MCX-SX are launching futures trading in these three new
currency pairs with effect from February 1, 2010.
As per the roadmap, SEBI will give permission to recognized stock exchanges for
starting trading in currency derivatives. After obtaining SEBI approval, the
recognized stock exchange will have to approach RBI to obtain permission under
FEMA (Foreign Exchange Management Act) for trading, clearing and settlement
of Currency Derivatives.
Page 8 of 17
7. DEFNITION OF CURRENCY FUTURES
Currency futures means a standardized foreign exchange derivative contract traded on a

recognized stock exchange to buy or sell one currency against another on a specified
future date, at a price on the date of contract, but does not include a forward contract.
8. BASIC ASPECTS OF CURRENCY FUTURES*

(common to all the four currency pairs)
Four currency pairs are allowed to be traded (Originally in August 2008,

only USD-INR was allowed. From 19.01.2010, three more currency pairs
namely, EUR-INR, GBP-INR and JPY-INR are allowed by RBI).
The contracts shall be quoted in Indian Rupees. However, the
outstanding position would be reported in the respective foreign currency.
All the contracts would be cash settled in Indian Rupees
The maximum maturity of the contracts shall be 12 months
All monthly maturities from one to 12 months would be made available
Contract trading cycle: All the futures contracts of four currency pairs will
have a 12 month trading cycle. A new contract will be introduced after 12
noon on the last trading day of the near month contract.
Expiry day & time: All the futures contracts of four currency pairs shall
expire at 12 noon, two working days prior to the last business day of the
expiry month.
Order quotation: While US dollar, Euro and Pound Sterling will be quoted
for one unit of foreign currency in Indian rupees; for Japanese Yen, the
quotation will be for 100 JPY in Indian rupees.
Permitted lot size: For USD, EUR and GBP, the lot size will be 1,000
foreign currency; for JPY it will be 1,00,000 JPY (since quotation is for
100 Japanese Yen; lot size on trading system shall be 1,000 JPY)
Order placement: Members shall place orders in terms of number of lots
The settlement price shall be RBI’s Reference Rate on the last trading
day for USD and Euro. For GBP and JPY, the settlement price shall be
exchange rate published by the Reserve Bank in its Press Release
captioned “RBI Reference Rate for USD and Euro.”
On stock exchanges the trade timings would be from 9 a.m. to 5 p.m.
FINAL SETTLMENT DAY: The contract would expire on the last working
day (excluding Saturdays) of the month. The last working day would be
taken to be the same as that for Interbank Settlements in Mumbai. The
rules for Interbank Settlements, including those for ‘known holidays’ and
‘subsequently declared holiday’ would be those as laid down by FEDAI.
* These are sourced from circulars on NSE website
Page 9 of 17
9. RBI’s ELIGIBILITY CRITERIA FOR BANKS
Banks authorized by RBI as ‘Category-I Authorized Dealers’ are permitted to become

trading and clearing members subject to the following minimum prudential requirements:
Minimum net worth of Rs 500 crore
Minimum Capital Adequacy Ratio (CRAR) of 10 per cent
Net NPA (non-performing assets) should not exceed three per cent
Made net profit for the last three years
Such banks can resort to proprietary dealings or do trades on behalf of their clients in
the currency derivatives segment of the exchange as per the rules of RBI and SEBI.
10. NEW versus OLD MARKET (Futures vs Forwards)
Till August 2008, Resident Indians had the following over-the-counter (OTC) products: 1.
Currency forwards and 2. Swaps and options. These are used by companies, institutions and
residents to hedge their risks. With the introduction of currency futures by SEBI and RBI and
the inauguration of trading of currency futures on NSE in August 2008, only persons resident
in India will have the option of trading in currency futures on recognized stock exchanges.
The differences between OTC products and currency futures are given below:
CURRENCY FUTURES OTC MARKET (forwards)

Standardized product dealt on a Customized product to suit the
recognized stock exchange individual requirements of the
clients, but not traded on a stock
exchange
Contract size (amount) is uniform/fixed Contract size depends on the needs
of the clients
Persons resident in India can trade on Underlying exposure to foreign
any recognized stock exchange currency is required before entering
without having any underlying in the in to a forward contract
foreign currency
Counterparty risk is eliminated by a Counterparty risk exists in a forward
stock exchange contract
Mark-to-market (MTM) obligations are No such MTM obligations
settled on a daily basis
Multi-party contracts Bi-lateral contract
Page 10 of 17
11. ELIGIBILITY CRITERIA FOR DEALING IN CURRENCY FUTURES
Only persons resident in India are allowed to purchase or sell currency futures to
hedge an exposure to foreign exchange rate risk or otherwise. This means
persons resident in India can trade in currency futures without any underlying
exposure to the currency in question. However, persons resident outside India,
for example, like, Foreign Institutional Investors (FIIs) and Non-Resident Indians
(NRI) can not participate in the currency futures market. FIIs usually speculate on
the Indian currency in the non-deliverable forward (NDF) market in Singapore.
12. MECHANISM INVOLVED

As per the guidelines, the size for currency pair USD-INR currency futures contract is
USD 1,000 and the tick size is 0.25 paise. Let us assume a person resident in India
wants to pay for his child’s education abroad after three months. The person is not sure
about the future movement of the US dollar against Indian rupee. So, this person can
buy, depending on the cost of overseas education, five currency futures contracts (each
fixed at USD 1,000), of three months expiry at say Rs 44 per dollar; amounting to a
notional value of Rs 2,20,000 (5 x 1000 x 44). He need not pay full contract value of Rs
2,20,000; but only 2.75 to three per cent of total amounting to Rs 6,050 or Rs 6,600.
Now, at the end of three months if dollar goes up to Rs 45, he would have a gain of Rs
5,000 (5000 x 45-44). And in case the dollar is down to Rs 42, he would incur a loss of
Rs 10,000 (5000 x 44-42). This transaction involves costs, like, margining, brokerage,
cost of carry, etc.
MARGIN REQUIREMENTS for USD-INR Contract (Full Details for all the four
currency pairs are given in the Annexure 1): Basically there are three types of
margins - Initial Margin (Also called the SPAN Margin), the Extreme Loss Margin and
Calendar Spread Margin. The Initial Margin is 1.75 per cent MINIMUM on the first day of
the contract (that means the first day of introduction of a contract – the margin is higher
on first day because there is no historical price trend available for the contract) and one
per cent MINIMUM thereafter. The word 'Minimum' is very important here. Practically it is
never at the minimum levels. We find that it is around 1.75% - 2% now (whether first day
or other days). During peak volatility in USD/INR, this has gone up to 3% also. This
margin can be changed up to six times a day depending on the volatility of the market.
The initial margin shall be deducted from the liquid networth of the clearing member on
an online, real time basis.
Extreme Loss margin is always 1% flat. So, the total margin now is approximately 2.75%
to 3% in all. The above calculation is only for one sided position. If any client takes a
calendar spread position (long in one contract and short in another), the calendar spread
margin shall be at a value of Rs. 400 for a spread of 1 month; Rs 500 for a spread of 2
months, Rs 800 for a spread of 3 months and Rs 1,000 for a spread or 4 months or
more. The benefit for a calendar spread would continue till expiry of the near month
contract. The client can avail the benefit of calendar spread till the maturity of the nearer
leg contract. (These are only for USD-INR pair and for other pairs, see Annexure 1.)
Page 11 of 17
13. BENEFITS OF CURRENCY FUTURES
1. Act as a better risk management tool for companies and individuals
2. Facilitate efficient price discovery
3. Enable better counterparty credit risk management
4. Wider participation is ensured
5. Trading of standardized products enable higher transparency, efficiency and

accessibility and simplicity
6. Reduction of transaction costs
As the market lot is small (USD 1,000; Euro 1,000; GBP 1,000 and JPY
1,00,000) in currency futures market, small companies and individual investors can
access this market with low transaction costs.
14. THEIR LIMITATIONS
Persons resident outside India are not eligible to participate in the

currency futures market. This effectively means that FIIs and NRIs cannot
participate. Their presence would have created tremendous depth and liquidity to
this new market, market participants feel. Client Level position is restricted to
USD 5 million.
Currency futures involve some costs, like, margin, brokerage, etc. RBI’s
possible intervention in foreign exchange markets to keep the rupee stable may
some times impact the participants who have taken exposure to currency futures.
Page 12 of 17
15. SEBI’s RULE ON OPEN POSITION LIMIT
POSITION LIMITS FOR USD-INR CONTRACTS:

(Full details for all the four currency pairs are given in Annexure 2)
1. Trading Member Level: The gross open position of a trading member shall
not exceed 15 per cent of the total open interest or USD 50 million (raised
from 25 million to 50 million on 24.03.2009), whichever is higher. However, if
the trading member is a bank, the gross open position shall not exceed 15 per
cent of the total open interest or USD 100 million, whichever is higher.
2. Client Level: The gross open positions of the client should not exceed 6%
of the total open interest or USD 10 million (raised from 5 million to 10 million
on24.03.2009), whichever is higher.
RECOGNIZED STOCK EXCHANGES: National Stock Exchange (NSE) is the

first exchange to have received an in-principle approval from SEBI for setting up
currency derivative segment. NSE is the first to start trading in currency futures
trading in India.
NSE had started trading on August 29, 2008. Bombay Stock Exchange
started Currency Futures trading on BSE on October 1st, 2008. MCX Stock
Exchange, an arm of MCX Limited, launched currency futures on October 6,
2008. The live trading started on October 7, 2008.
REGULATORY AUTHORITIES: Both RBI and SEBI
16. IMPACT OF CURRENCY FUTURES
In India, there is an active OTC (over-the-counter) market for forwards with an

average daily turnover of more than USD 40 billion. For the first time in India, it
was made possible to trade on the currency futures on an exchange platform
since August 2008.
Some experts believe that the introduction of currency futures is an important

step on the road to capital account convertibility. This will help corporates to
hedge their currency risks in a better manner. Students who have taken
educational loans for their overseas education, Indians getting inward
remittances from abroad and outbound travelers also can take advantage of this
new instrument.
Page 13 of 17
Individual investors are attracted to participate in currency futures as the contract

size is quite small at USD 1,000 (roughly, Rs 46,000 now and for other currency
pairs, the amount would be different). The question that arises here is why do
individuals need to take such a currency position. India has witnessed many
takeovers and amalgamations in the past decade thanks to the liberalization of
economic policies. As a result, many Indian companies carry high exposure to
currency risks as their export and import content has gone up substantially due to
increased trade and services. Indirectly, equity investors in such Indian
companies are also exposed to currency risks.
Small companies also may find the currency futures more attractive compared to
OTC market due to lower transaction costs in currency futures. As the client level
open position limit is pegged at USD 10 million, the currency futures may be
more conducive to small companies as compared to big companies. However,
the OTC market is very big; hence, it remains to be seen how the currency
futures market pans out even though volumes have been robust in the last one
year and a half.
The introduction of currency futures market is expected to strengthen the bond-

currency-derivatives (BCD) nexus. BCD nexus is a process whereby bond,
currency and derivate markets are influenced by one another.
This new instrument is providing banks, exchanges and brokers with a new
avenue for revenues. Till the middle of 2008, banks had been doing currency
dealings through the OTC market. Since then, banks have been offering currency
futures by becoming trading members of the recognized stock exchanges. Banks
need not go to brokers for dealing in currency futures once they become trading
members of the stock exchanges and are permitted to undertake currency
futures trading.
Speculators may also find some arbitrage opportunities between the OTC market
and the exchange-traded currency futures market.
CERTIFICATION FROM NISM COMPULSORY FOR DEALERS OR BROKERS:
SEBI has mandated that all the existing approved users/sales personnel of the
trading member in the currency derivative segment shall obtain certification from
NISM (established by SEBI). Accordingly, all the users and personnel connected
with the product have to complete this NISM certification, which enables users to
have prior knowledge of all the important aspects of this new product, before the
stipulated date as prescribed by SEBI in this regard.
Page 14 of 17
Annexure 1
INITIAL MARGIN
USD-INR EUR-INR GBP-INR JPY-INR
The Initial Margin The Initial Margin The Initial Margin The Initial Margin
requirement shall be based requirement would be requirement would be requirement would be
on a worst case loss of a based on a worst case loss based on a worst case loss based on a worst case loss
portfolio of an individual of a portfolio of an of a portfolio of an of a portfolio of an
client across various individual client across individual client across individual client across
scenarios of price changes. various scenarios of price various scenarios of price various scenarios of price
The various changes. The various changes. The various changes. The various
scenarios of price changes scenarios of price changes scenarios of price changes scenarios of price changes
would be so computed so would be so computed so would be so computed so would be so computed so
as to cover a 99% VaR as to cover a 99% VaR as to cover a 99% VaR as to cover a 99% VaR
over a one day horizon. In over a one day horizon. In over a one day horizon. In over a one day horizon. In
order to achieve this, the order to achieve this, the order to achieve this, the order to achieve this, the
price scan range may price scan range shall be price scan range shall be price scan range shall be
initially be fixed at 3.5 fixed at 3.5 standard fixed at 3.5 standard fixed at 3.5 standard
standard deviation. The deviation. The initial margin deviation. The initial margin deviation. The initial margin
initial margin so computed so computed would be so computed would be so computed would be
would be subject subject to a minimum of subject to a minimum of subject to a minimum of
to a minimum of 1.75% on 2.80% on the first day of 3.20% on the first day of 4.50% on the first day of
the first day of currency trading and 2% thereafter. trading and 2% thereafter. trading and 2.30%
futures trading and 1 % The initial margin shall be The initial margin shall be thereafter. The initial
thereafter. The initial deducted from the deducted from the margin shall be deducted
margin shall be deducted liquid networth of the liquid networth of the from the liquid networth of
from the liquid networth of clearing member on an clearing member on an the clearing member on an
the clearing member on an online, real time basis. online, real time basis. online, real time basis.
online, real time basis.
CALENDAR SPREAD MARGIN
A currency futures position A currency futures position A currency futures position A currency futures position
at one maturity which is at one maturity which is at one maturity which is at one maturity which is
hedged by an offsetting hedged by an hedged by an hedged by an
position at a different offsetting position at a offsetting position at a offsetting position at a
maturity would be treated different maturity would be different maturity would be different maturity would be
as a calendar spread. The treated as a calendar treated as a calendar treated as a calendar
calendar spread margin spread. The calendar spread. The calendar spread. The calendar
shall be at a value of Rs. spread margin shall be at a spread margin shall be at a spread margin shall be at a
400 for a spread of 1 value of Rs. 700 for a value of Rs. 1500 for a value of Rs. 600 for a
month; Rs 500 for a spread spread of 1 month; Rs spread of 1 month; Rs 1800 spread of 1 month; Rs 1000
of 2 months, Rs 800 for a 1000 for a spread of 2 for a spread of 2 months for a spread of 2 months
spread of 3 months and Rs months and Rs 1500 for a and Rs 2000 for a and Rs 1500 for a
1,000 for a spread or 4 spread of 3 months or spread of 3 months or spread of 3 months or
months or more. The more. The benefit for a more. The benefit for a more. The benefit for a
benefit for a calendar calendar spread would calendar spread would calendar spread would
spread would continue till continue till expiry of the continue till expiry of the continue till expiry of the
expiry of the near month near month contract. near month contract. near month contract.
contract.
EXTREME LOSS MARGIN
Extreme loss margin of 1% Extreme loss margin of Extreme loss margin of Extreme loss margin of
on the mark to market 0.3% on the mark to market 0.5% on the mark to market 0.7% on the mark to market
value of the gross open value of the gross open value of the gross open value of the gross open
positions shall be deducted positions shall be deducted positions shall be deducted positions shall be deducted
from the liquid assets of the from the liquid assets of the from the liquid assets of the from the liquid assets of the
clearing member on an clearing member on an on clearing member on an on clearing member on an on
online, real time basis. line, real time basis. line, real time basis. line, real time basis.
Page 15 of 17
Annexure 2
POSITION LIMITS: CLIENT LEVEL

USD-INR EUR-INR GBP-INR JPY-INR
Client Level: The gross Client Level: The gross Client Level: The gross Client Level: The gross
open positions of the client open positions of the client open positions of the client open positions of the client
across all contracts across all contracts across all contracts across all contracts
should not exceed 6% of shall not exceed 6% of the shall not exceed 6% of the shall not exceed 6% of the
the total open interest or total open interest or EUR total open interest or GBP 5 total open interest or JPY
USD 10 million whichever 5 million whichever is million whichever is higher. 200 million whichever is
is higher. The Exchange higher. The Exchange will The Exchange will higher. The Exchange will
will disseminate alerts disseminate alerts disseminate alerts disseminate alerts
whenever the gross open whenever the gross open whenever the gross open whenever the gross open
position of the client position of the client position of the client position of the client
exceeds 3% of the total exceeds 3% of the total exceeds 3% of the total exceeds 3% of the total
open interest at the end of open interest at the end of open interest at the end of open interest at the end of
the previous day’s trade. the previous day’s trade. the previous day’s trade. the previous day’s trade.
POSITION LIMITS: TRADING MEMBER LEVEL
The gross open positions of The gross open positions of The gross open positions of The gross open positions
the trading member the trading the trading of the trading
across all contracts should member across all member across all member across all
not exceed 15% of the total contracts shall not exceed contracts shall not exceed contracts shall not exceed
open interest or USD 50 15% of the total open 15% of the total open 15% of the total open
million (raised from USD interest or EUR 25 million interest or GBP 25 million interest or JPY 1000
25 million to USD 50 million whichever is higher. whichever is higher. million whichever is
on 24.3.09) whichever is higher.
higher.
POSITION LIMITS: BANK LEVEL (When Bank is a trading member)
The gross open positions of The gross open positions of The gross open positions of The gross open positions of
a bank across all contracts the bank across all the bank across all the trading member across
shall not exceed 15% of the contracts shall contracts shall all contracts shall not
total open interest or USD not exceed 15% of the total not exceed 15% of the total exceed 15% of the total
100 million, whichever is open interest or EUR 50 open interest or GBP 50 open interest or JPY 2000
higher. million whichever is higher million whichever is higher. million whichever is higher.
POSITION LIMITS: CLEARING MEMBER LEVEL
No separate position limit is No separate position limit is No separate position limit is No separate position limit is
prescribed at the level of prescribed at the level of prescribed at the level of prescribed at the level of
clearing member. However, clearing member. However, clearing member. However, clearing member. However,
the clearing member shall the clearing member shall the clearing member shall the clearing member shall
ensure that ensure that his own trading ensure that his own trading ensure that his own trading
his own trading position position and the positions position and the positions position and the positions
and the positions of each of each trading member of each trading member of each trading member
trading member clearing clearing through him is clearing through him is clearing through him is
through him is within the within the limits specified within the limits specified within the limits specified
limits specified above. above. above. above.
Page 16 of 17
References:
1. Standing Technical Committee Report on Currency Futures-Final Report-Jointly by

RBI and SEBI released on May 29, 2008
2. Inputs from Sri Janakiraman R, a veteran currency dealer from a leading private
sector bank in UAE
3. SEBI Guidelines on Currency Futures-dated Aug. 6, 2008 and January 19, 2010
4. SEBI amendment dated March 24, 2009
5. Websites of NSE, BSE and MCX-SX
6. SEBI monthly bulletins
7. NCFM Exam Module by National Stock Exchange Limited
8. RBI Guidelines on Currency Futures-dated Aug. 6, 2008 and January 19, 2010
9. NSE guidelines dated 29.1.2010 on launching of trading in three new currency pairs
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Currency Futures in India-UPDATE-NSE & MCX-SX To Launch Trading in 3 New Pairs EUR, GBP & JPY-VRK100-22012010

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By Rama Krishna Vadlamudi January 30, 2010

In its second quarter review of Annual Policy (Monetary Policy) released on

STATUS CHECK ON CURRENCY FUTURES IN INDIA:

1. TRADED VOLUMES OF ALL EXCHANGES

Total Traded value-all exchanges (Rs crore)

2. NUMBER OF CONTRACTS TRADED ON ALL EXCHANGES

Total No. of contracts traded-all exchanges (No. in lakh)

3. MONTH-END OPEN INTEREST

Month-end Open interest-all exchanges (Rs in crore)

4. THE SPAT BETWEEN NSE AND MCX-SX

Total Market Share (Traded value) %

Table 3: Market Share between NSE and MCX-SX (Data: SEBI)

5. SUCCESS RATE OF THE CURRENCY FUTURES

SEBI REPORT FOR JANUARY-MARCH 2009 QUARTER:

The percentage share of Retail Participants in turnover was 41% at NSE,

Till now, we have analysed the practical working of currency futures

6. PREAMBLE TO CURRENCY FUTURES

7. DEFNITION OF CURRENCY FUTURES

Currency futures means a standardized foreign exchange derivative contract traded on a

8. BASIC ASPECTS OF CURRENCY FUTURES*

Four currency pairs are allowed to be traded (Originally in August 2008,

* These are sourced from circulars on NSE website

9. RBI’s ELIGIBILITY CRITERIA FOR BANKS

Banks authorized by RBI as ‘Category-I Authorized Dealers’ are permitted to become

10. NEW versus OLD MARKET (Futures vs Forwards)

CURRENCY FUTURES OTC MARKET (forwards)

11. ELIGIBILITY CRITERIA FOR DEALING IN CURRENCY FUTURES

12. MECHANISM INVOLVED

13. BENEFITS OF CURRENCY FUTURES

1. Act as a better risk management tool for companies and individuals

2. Facilitate efficient price discovery

3. Enable better counterparty credit risk management

4. Wider participation is ensured

5. Trading of standardized products enable higher transparency, efficiency and

14. THEIR LIMITATIONS

Persons resident outside India are not eligible to participate in the

15. SEBI’s RULE ON OPEN POSITION LIMIT

POSITION LIMITS FOR USD-INR CONTRACTS:

RECOGNIZED STOCK EXCHANGES: National Stock Exchange (NSE) is the

REGULATORY AUTHORITIES: Both RBI and SEBI

16. IMPACT OF CURRENCY FUTURES

In India, there is an active OTC (over-the-counter) market for forwards with an

Some experts believe that the introduction of currency futures is an important

Individual investors are attracted to participate in currency futures as the contract

The introduction of currency futures market is expected to strengthen the bond-

CERTIFICATION FROM NISM COMPULSORY FOR DEALERS OR BROKERS:

POSITION LIMITS: CLIENT LEVEL

1. Standing Technical Committee Report on Currency Futures-Final Report-Jointly by

4. SEBI amendment dated March 24, 2009

5. Websites of NSE, BSE and MCX-SX

6. SEBI monthly bulletins

7. NCFM Exam Module by National Stock Exchange Limited

THE BEST OF MY STUFF ON Reads

1. Goods and Services Tax-GST-an introduction 4,039

TOTAL READS have already crossed 37,000!

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