Soon, there won’t be any free lunches in the currency derivatives market. The National Stock Exchange (NSE) has decided to start charging a fee, in deference to the order by the Competition Commission of India (CCI). MCX Stock Exchange, which had complained to CCI about NSE’s policy of continuing with zero charges for a prolonged period, will evidently follow suit. United Stock Exchange has said that its board will meet this month to take a call on imposing charges.
NSE has decided to levy transaction charges of between Rs1 and Rs1.15 for every Rs1 lakh of trading in currency futures contracts and between Rs30 to Rs40 for every Rs1 lakh of premium paid in the currency options segment. How will this impact volumes?
It should be noted here that one of the reasons the currency derivatives market has grown by leaps and bounds is that traders incurred hardly any statutory levies and exchange fees. While the exchanges had waived fees, the segment has also been left out of the purview of securities transaction tax (STT). In comparison, the cost of trading was much higher in the equity derivatives segment. In the equity futures segment, NSE levies a minimum charge of Rs1.75 per lakh and in addition, there is an STT of roughly Rs17 per lakh on the sell leg of futures transactions. On a round trip, therefore, the cost works out to over Rs20 per lakh worth of trading. The incidence of STT is much lower with equity options, which is also one of the key reasons this segment now accounts for the bulk of trading within equity derivatives.
Traders generally veer towards products where transaction charges and taxes are minimal, and the currency derivatives segment has been a major beneficiary of this trend. Since STT will still not be applicable, it appears prima facie that trading in the currency derivatives segment will still be relatively cheaper with respect to transaction costs.
But one must also note that traders work on ultra thin margins in the currency segment. At least some of these trades will get affected, when traders start accounting for the new charge of Rs2-2.3 for every round trip worth Rs1 lakh. A little over a year ago, trading volumes in the currency futures segment were hit badly after the Delhi state government imposed a stamp duty of Rs2 per lakh on currency futures trades. Volumes recouped eventually, but that was after some large volume providers who operated out of Delhi shifted base. According to industry sources, some brokers based in Delhi even closed their currency trading desks. Of course, exchange fees can’t be avoided by shifting base.
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Thankfully, volumes and open interest have already risen to high levels and while there may be a drop in volumes, the market won’t get destabilized. So far this month, the three exchanges have averaged daily volumes of $18 billion and together have an open interest of nearly $10 billion. There are an increasing proportion of genuine users on the exchange-traded currency derivatives platform, which is evident from the healthy open interest levels. Of course, it still remains to be seen how the market will adjust to the reality of paying transaction charges to exchanges.
Now, while NSE has decided to levy charges in deference to the CCI order, it is also expected to challenge the order in the Competition Appellate Tribunal. If the Tribunal rules in its favour, it can well come back to its zero pricing policy or lower charges. Whatever the outcome, the currency derivatives market will continue to be filled with action.
NSE and FTIL see eye-to-eye, finally
NSE and Financial Technologies (India) Ltd (FTIL) have finally settled their nearly three-year old dispute. NSE had put FTIL’s trading software under a “watch list” and had denied it permission to enable trading of NSE’s currency futures segment on its trading software.
The two companies have now filed consent terms with the Bombay high court, citing that NSE will remove FTIL from its “watch list” and give necessary permissions to trade currency futures using FTIL’s trading software. According to reports, FTIL has agreed to an inspection of its software.
Needless to say, this is a positive development, since market participants were suffering because of this stand-off. Having said that, one can’t rule out similar problems in the future. As pointed out in this column before, conflicts of interest arise when exchange groups or related entities provide trading software. In fact, NSE and the Bombay Stock Exchange (BSE) are also in the midst of a stand-off, with the latter refusing to give the former permission to enable trading of BSE equity segments on its trading platform. This is because of concerns about a conflict of interest with respect to the misuse of an exchange’s trading software, favouring its own markets.
Of course, it would have been ideal if exchanges hadn’t pursued the trading technology business and vice-versa. But now that all exchange groups have links with trading technology companies, the next best solution is to allow inspection of all such software and put each others’ concerns at rest.
Illustration by Shyamal Banerjee/Mint
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