Mumbai: The National Stock Exchange of India Ltd (NSE) on Friday decided to do away with its zero-fee policy for trading in currency derivatives. It will start charging all currency derivative trades on 22 August.
The move assumes significance in the wake of a June order by the Competition Commission of India (CCI), which found the exchange to be following an unfair pricing policy and using its dominant position to attract more business, hurting its peers.
NSE launched currency derivatives trading in August 2008, offering it free of cost to investors. Subsequently, MCX Stock Exchange Ltd (MCX-SX) made its debut in the exchange business with its first and only product—currency derivatives. MCX-SX is promoted by Multi Commodity Exchange of India Ltd and Financial Technologies (India) Ltd (FTIL).
BSE Ltd, Asia’s oldest bourse, has also launched its currency derivatives trade platform—United Stock Exchange of India Ltd (USE).
Due to NSE’s zero-fee policy, MCX-SX also had to offer free trading in currency derivatives, the CCI order said. USE also does not charge for currency trading.
In 2009, MCX-SX had sought CCI’s intervention to force NSE to levy charges for currency derivatives trading.
For currency futures, NSE will charge Rs 1.15 each from both the buyer and the seller for trades worth Rs 1 lakh. This pricing will be applicable till the total trade value reaches Rs 2,500 crore a month.
Once the value crosses Rs 2,500 crore, the charge will come down to Rs 1.10 up to Rs 7,500 crore trade in a month. The fee will come down further to Rs 1.05 when the total trade in a month crosses Rs 7,500 crore. Progressively, the fee will be pared till Rs 1 with the rise in trade volume.
Also, an advance transaction charge of Rs 50,000 per member will be levied every year. This will be set off against actual transaction charges, payable by the member.
An admission fee of Rs 1 lakh will also be charged from existing trading members for currency derivatives and Rs 5 lakh for others, an NSE statement said.
“When NSE had waived charges in currency derivatives trading, it was to benefit investors and develop the markets. The waiver has actually benefited investors. While we are challenging the CCI order... out of respect for the commission, NSE is following the directive to levy charges,” said an NSE official, on condition of anonymity.
The daily average volume of currency derivatives traded on NSE in August is Rs 24,920.46 crore. MCX-SX’s trading volume is Rs 28,574.55 crore and that of USE, the newest entrant, is Rs 16.66 crore.
“This is a very positive development for the currency derivatives market and would encourage healthy competition. We welcome this move by NSE to implement the decision of CCI,” said Joseph Massey, managing director and chief executive of MCX-SX.
“We will decide (on levying charges) after an internal meeting,” said USE president for marketing and business development Saurabh Arora.
MCX-SX had alleged it had made losses due to its inability to levy charges to protect market share.
CCI, in its order, found NSE guilty of using its dominant position and forcing new entrants in the currency derivatives space to incur losses while offering free trading in the segment. CCI has levied a penalty on NSE for unfairly using its dominant position.
“Considering the fact that there was a clear intention on the part of NSE to eliminate competitors in the relevant market and also considering the fact that Competition Act is a new Act, it would suffice if penalty at the rate of 5% of the average turnover is levied... NSE is directed to pay penalty of Rs 55.5 crore within 30 days of the date of receipt of the order, which is 5% of the average of its three years’ annual turnover,” the CCI order said.
NSE has been directed to cease and desist from “unfair pricing”, “exclusionary conduct” and “unfairly using its dominant position in other market/s” to protect the relevant currency derivatives market with immediate effect.
NSE is expected to appeal against the CCI order later this month at the appellate tribunal of the commission.
NSE’s latest move comes close on the heels of a recent settlement of a legal dispute with FTIL, a software provider and promoter of MCX-SX, on the use of ODIN software.
The software provides an interface between brokers and exchanges. NSE has been using ODIN for over a decade for its equity and derivatives segments, but in October 2008, citing systems and performance issues, NSE put ODIN on the watchlist for its currency derivatives segment, where MCX-SX is a rival.
This prevented brokers from using ODIN for trading in currency derivatives on NSE.
FTIL, in 2009, filed a suit against NSE in the Bombay high court for its decision to put ODIN on the watchlist.
NSE authorized Bangalore-based Omnesys Technologies Pvt. Ltd to provide software for currency futures trading.
NSE brokers use ODIN and NOW (the software developed by Omnesys) for trading in equities and derivatives. But for currency derivatives, they use only NOW.
Industry experts said the levy of charges will bring down the volume in exchange-traded currency derivatives that recently crossed Rs 1 trillion after the Reserve Bank of India’s rate hike in July.
“Retail investors, particularly speculators, who were seen participating in the currency derivatives market in the absence of any charge, will look for opportunities in other asset classes,” said Pramit Brahmbhatt, chief executive of Alpari Forex (India) Pvt. Ltd.
Smaller clients trading in their individual capacity, however, will not be affected much as they don’t transact large volume.
“Once fee is imposed, there will not be any special incentive for retail investors to come into the currency market. The jobbers and arbitrageurs will be affected the most as they operate on a very thin margin,” said Brahmbhatt.
Jobbers are traders who operate on every tick in currency prices. They accumulate volume from various smaller clients and operate on thin margins.
Since currencies don’t move like equities, volumes drive margins. Typically, a jobber’s margin, excluding brokerage, is around Rs 120 per tick per Rs 1 crore volume on one side of the transaction—either for buying or selling. Margins will come down drastically following the new fee structure.