Mumbai: At least a dozen banks, financial institutions and other companies are joining hands to set up India’s fourth exchange for currency futures despite a drop in trading volume in the instruments, launched in the last week of August on an exchange set up by the National Stock Exchange (NSE).
If the project gets the nod of capital market regulator Securities and Exchange Board of India (Sebi), it will follow NSE and two other exchanges that will be set up by the Multi-Commodity Exchange of India (MCX), and Asia’s oldest stock exchange, the Bombay Stock Exchange (BSE)—both of which have secured Sebi’s approval.
Kerala-based private lender, Federal Bank Ltd, has taken the lead to set up the new exchange and its partners in the venture include Bank of India, Bank of Baroda, Indian Overseas Bank, Canara Bank, Andhra Bank, Allahabad Bank, Oriental Bank of Commerce and Standard Chartered Bank.
Metals and Minerals Trading Corp. Ltd, Securities Trading Corp. of India Ltd and Tata Consultancy Services Ltd, India’s largest information technology firm, are also partnering the banks in the project.
A person familiar with the development told Mint on condition of anonymity that HDFC Bank Ltd, Deutsche Bank AG and Larsen and Toubro Ltd may pick up equity in the proposed stock exchange.
He said these institutions are also in talks with the Chicago Mercantile Exchange, the world’s largest commodities exchange, and a benchmark one, to pick up a stake in the new exchange.
Audit and consulting firm firm Ernst and Young is advising the group of companies and banks on the project. A presentation on it was made to Sebi on Thursday and the new exchange might be called India Stock Exchange Ltd or India Securities and Stock Exchange Ltd, this person said. Mint could not independently contact all the interested banks and companies to confirm their participation, but Federal Bank chairman M. Venugopalan said the proposed exchange will be widely held by many banks and firms. An executive at Sebi, who did not want to be named, confirmed that the presentation was made.
Sebi regulations prohibit a single entity from holding more than a 5% stake in a stock exchange and any entity that wants to hold more than a 1% stake in stock exchanges needs the regulator’s approval.
However, there could be relaxation on the ownership norms, as a recent Sebi discussion paper has proposed that stock exchanges, banks, clearing corporations and insurance companies be allowed to take up to a 15% stake in bourses.
“Competition forces everyone to be more efficient and more innovative,” said Jayanth R. Varma, professor of finance and accounting at the Indian Institute of Management, Ahmedabad. “In case of currency futures, competition is already there in form of the over-the-counter market. But competition between exchanges will still be good.”
However, A.V. Rajwade, an independent foreign exchange consultant, has a different view. According to him, the market may be diluted if three or four exchanges are allowed to operate. “What is needed is liquidity. I don’t know if three or four players are really needed. Ultimately, if you look at it in terms of participation because liquidity attracts players, one of them them will dominate,” Rajwade said.
NSE introduced currency futures trading on 29 August but there are not too many takers for the product on account of so-called margin requirements.
The average trading volume in the currency futures market is around $45 million (about Rs206 crore), compared with $3.5 billion in the forward markets in India, and a $1 billion daily turnover of non-deliverable forwards (NDF) overseas. NDFs are those contracts which do not require settlement in dollars (this is made in the local currency).
Even as the new exchanges are trying to boost their membership by offering discounts, NSE said it will introduce futures in other currencies such as the Japanese yen, euro, Chinese yuan and pound sterling to increase volumes on its platform. So far, only rupee-dollar futures trading is allowed.
Moving towards full convertibility of the rupee, the Reserve Bank of India and the country’s finance ministry are working on freeing the restrictions on trade in financial derivatives such as interest rate futures and credit default swaps.
“After this, we need to revitalize the exchange-traded interest rates derivatives market, we need to offer exchange-traded credit derivatives, and we need to strengthen the corporate bond market,” Union finance minister P. Chidambaram had said during the 29 August launch of currency futures trading.