Rama Krishna Vadlamudi January 22, 2010
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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 the currency futures from a layman’s point of view.
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.
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.)
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Reserve Bank of India had on 8th July 2013 directed Category 1 Authorized Dealers not to carry out proprietary transactions in currency futures/exchange-traded currency options markets with immediate effect. This direction follows the record fall of rupee to 61.21 intra-day on 8Jul2013 against the US dollar.
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