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Business News/ Opinion / Baby steps to currency market reforms are a bad idea
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Baby steps to currency market reforms are a bad idea

Trading hours have been extended by only a bit and that too only for newly launched contracts

Jayachandran/MintPremium
Jayachandran/Mint

It turns out news reports about the extension of trading hours in the exchange-based currency derivatives market and the introduction of cross-currency pairs weren’t off the mark. Earlier this month, India’s central bank and securities market regulator moved forward on both aspects.

It’s undoubtedly heartening to see the otherwise reticent Reserve Bank of India being open to some of these suggestions from market participants. Nevertheless, market intermediaries are feeling underwhelmed on both counts. Trading hours have been extended by only a bit and that too only for newly launched contracts. Besides, the circular allowing cross-currency pairs such as the euro-dollar includes a stipulation that can prove to be a spoilsport.

As things stand, trading largely takes place in dollar-rupee futures and options contracts, which account for around 99% of the total open interest on the National Stock Exchange and BSE. Interest in other contracts such as the euro-rupee and yen-rupee is expectedly minuscule. Market participants have been asking for new currency pairs, such as the euro-dollar, which is a vastly popular contract in global markets. The Indian markets will finally have these products in the exchange space, which is undoubtedly welcome.

One potential hurdle for the new products is a stipulation that any synthetic positions created using these products should be within the position limits already prescribed by regulators. For instance, consider a trader who already has a $10 million open interest in the dollar-rupee contract, and then creates a euro-dollar position worth $10 million. Individually, both these positions fall within prescribed limits. However, the two contracts create a synthetic euro-rupee exposure of $10 million; which breaches the client-level position for this contract, which is set at a lower level of $5 million. As such, traders who already have a dollar-rupee exposure will be constrained in taking positions in the euro-dollar contract.

For clients that trade various currency pairs, it can also lead to a lot of confusion on the various synthetic positions that are getting created in the process. A workaround will be to aggregate all of a client or trading member’s positions and prescribe a position limit for aggregate short/long rupee exposure in the currency markets. Surely, regulators can’t be worried about Indian firms and traders cornering contracts such as the euro-dollar. To restrict access to this market, therefore, doesn’t make sense.

Another solution is to monitor only dollar-rupee exposure (direct and synthetic), and not bother about other synthetic positions, provided the client isn’t exceeding limits in individual contracts. Policy makers should address concerns about the synthetic positions stipulation to ensure new contracts get off to a decent start.

In a similar vein, trading these global contracts makes sense when they overlay with prominent markets such as those in the US. Extending trading timings only till 7.30pm is barely sufficient in this backdrop. The commodities markets are already open till 11.30pm and have handled settlements without glitches. What’s more, the Securities and Exchange Board of India is now regulating commodity exchanges. It looks strange that it is comfortable with allowing one of the segments it regulates to trade till 11.30pm, but is unsure about allowing the same benefit to users of another segment.

For trading firms, the slight increase in trading hours results in a quandary. They would now need to hire extra staff and invest in resources for the evening shift; although since only a couple of hours of extra business are involved, a question will arise whether it will be worth the investment.

Besides, the extended trading timings apply only for currency pairs that don’t involve the rupee, which essentially means that the largest section of the market is left out. Indian policymakers have a tradition of taking baby steps and later making incremental changes in areas such as product design. But in the process, precious years are lost until a product finally reaches its potential.

Some market participants are resigned to the fact that this aspect of Indian policymaking is unlikely to change. But as pointed out in this column earlier, India’s policymakers are working at cross-purposes by going slow with reforms in the exchange-traded markets. At the same time, they are bending over backwards to support the creation of international financial services centres, which will supposedly bring back volumes that India has lost out to centres, such as Dubai and Singapore. This is circular logic at its worst. Why lose out to other centres by creating so many hurdles in the first place?

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Published: 28 Mar 2016, 08:00 PM IST
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