On Monday, currency futures contracts worth $202.7 million (about Rs1,016 crore) were traded on the NSE. MCX-SX wasn’t far behind with a turnover of $192.2 million. On some occasions, the gap has been even lower and there have also been times when MCX-SX has trumped NSE in volume terms.

There are a few indications, however, that NSE is still at a slight advantage. It’s interesting to note that the depth of the order book has consistently been much better on NSE. On Monday, in the afternoon session, NSE had buy and sell orders worth $8-9 million in its order book at most times for its December contract. During the same period, MCX-SX’s order book for the December futures contract amounted to between $1.6 million and $3 million.

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And although the two exchanges are neck-and-neck in terms of contracts traded, the open interest on MCX-SX is less than half that of NSE. A relatively low open interest-volume ratio indicates a higher dependence on day traders who don’t keep their positions open till the end of the day. On the other hand, when a higher proportion of volumes are being held as open positions, that’s an indication of a greater proportion of genuine users on an exchange.

One could argue that while higher open interest is desirable from the point of view of the markets’ health, what really matters from an exchange’s point of view is turnover, since they charge fees as a percentage of turnover.

But having a higher open interest in the currency futures segment has practical benefits as well. Policymakers have fixed the maximum permissible client-wide position at $5 million or 6% of total open interest on an exchange, whichever is higher. Based on the open interest on the two exchanges—$149.6 million on NSE and $70.8 million on MCX-SX—a client can take a position of up to $9 million on the former and $5 million on the latter. Needless to say, a higher limit is advantageous in attracting large users. Some NSE clients are already said to have hit the $9 million limit.

Of course, this particular competitive advantage would be lost if and when policymakers increase position limits beyond the current floor level of $5 million limit. As Mint reported in a Page 1 story on 11 November, the Securities Exchange Board of India or Sebi is considering increasing the limit to $100 million.

Another policy change Sebi is considering is to allow foreign institutional investors or FIIs in the segment. This should be advantageous to NSE, which already caters to FIIs in a big way. MCX, however, hasn’t dealt with FIIs since they aren’t permitted in the commodity futures market that it operates.

An official in the exchange business, who did not want to be identified, says that both NSE and MCX are in talks with banks to provide market making facilities in the currency futures segment. Banks are already active in the segment and since they can access both the exchange-traded market as well as the much larger over-the-counter market, it gives them the unique ability to hedge bets and provide market making facilities. It’s likely that in such deals, exchanges may pay some banks to enhance liquidity.

It’s a pity that exchanges are forced to compete to price since policymakers haven’t left room for product innovation or any related initiatives in the hands of exchanges. Guidelines have been laid down from product design to even market timings. For instance, the currency futures market is allowed to be open between 9am till 5pm.

MCX’s commodity futures business is open much longer and enjoys large volumes in the late evening and night sessions as traders take cues from developed markets for commodities such as gold and crude. In fact, market talk suggests that there are proxy trades on the dollar-rupee that happen through the gold futures market, which is closely linked to currency movement. Such trades will naturally shift to the currency futures market, if it were open in the night. If exchanges had the freedom to decide market trading hours, MCX could well be at an advantage, since it already has the infrastructure and experience in running such operations in the commodities space.

It’s unfortunate that exchanges have to depend on regulators for all this and are left to compete mainly on price. With more exchanges set to enter the currency futures segment, the situation may only get worse. It’s time policymakers allowed more freedom with product design and innovation, of course with adequate safeguards.

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