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Home >Opinion >High time currency market trading hours are extended

India’s central bank and securities market regulator will soon issue guidelines for exchange-based trading in cross-currency pairs such as the euro-dollar. According to Financial Chronicle, they are also examining a proposal to extend trading hours beyond the current limit of 5pm.

Prima facie, all of this sounds like considerable progress, especially keeping in mind the myriad constraints the Reserve Bank of India (RBI) has imposed on the exchange-traded currency derivatives market. Thus far, RBI governor Raghuram Rajan has betrayed his reputation of being pro-reform, and has surprisingly not been very supportive of the more transparent exchange traded market. (See http://mintne.ws/1zBOy0n.)

But if the central bank can shed some of its inhibition, the above two measures can go a long way in the development of the exchange-traded currency derivatives market.

Currently, users, including those based in India, have to trade in overseas markets after markets close in India. Just like in the commodity markets, trading interest picks up when the US markets open—late evening Indian time. But none of this trading interest can be captured onshore because of restrictions on trade timings. In comparison, markets such as Singapore and Dubai are open for 12 hours and 16.5 hours, respectively, a recent report by the finance ministry’s standing council on international competitiveness of the Indian financial sector pointed out. “The overlap of trading time with other important offshore destinations for trading the Indian rupee is small. This means that after Indian markets close, price discovery for INR shifts to locations such as Dubai and Singapore," the report said. The council’s recommendation was not merely to increase trading hours, but to devolve the decision making on the matter to exchanges and authorised dealers.

Since the government’s stated objective is to try and bring back trading of the rupee back to Indian shores, it’s bizarre that India hasn’t yet moved on the basic issue of trading timings, leave alone weightier matters such as capital account convertibility.

Exchanges have been knocking on the doors of the Securities and Exchange Board of India (Sebi) on this for a long time now, and to the securities market regulator’s credit, it has taken it up with the central bank. Last year, in fact, they came close to agreeing to extending trading hours, with Sebi reportedly even sending exchanges a draft circular in this regard. The plan was later shelved; a Sebi official told Mint that since the spot market closes at 5pm, keeping the derivatives market open might create difficulties. This is inaccurate. The spot rate is used only for settling open positions at the maturity of the contract at the end of each month. As forex expert A.V. Rajwade told Mint at the time, the time of trade (for derivatives) is irrelevant.

Some years ago, there were apprehensions about the readiness of the banking system, and whether mark-to-market margins and others could be effectively collected post-banking hours. But Multi Commodity Exchange of India Ltd and its trading members have demonstrated for years now that this is possible. For all its shortcomings, it has never faced settlement issues, despite keeping its doors open till 11.30pm. Now that Sebi is regulating commodity exchanges, it would be foolhardy to suggest that the same benefits cannot be passed on to users of the exchange-traded currency markets.

RBI’s statement that it will soon permit cross-currency strategies by market participants provides a glimmer of hope that it is seeing things a little differently now, and that it may well be willing to budge on the trading hours issue.

As far as the prospects for cross-currency pairs go, much depends on the final guidelines on position limits and the applicability or non-applicability of documentation to establish underlying exposure. If limits are set too low, the product may not take off.

It’s worthwhile to note here that client position limits in the INR pairs remain pitifully low in the exchange-traded segment. At the same time, the central bank is making trading easier in the over-the-counter segment. As a result, the proportion of end users who use exchange-traded products to hedge forex exposure has fallen considerably. A number of Indian companies that had been using exchange-traded products to hedge risk earlier have moved away after the restrictions on position limits were imposed. This defeats the main purpose of having these derivatives markets.

The central bank will do well to review its policy on all these matters. Currently, it gets most of its feedback about the exchange-traded space from the securities market regulator, and on occasion, in dialogues with the exchanges. As a result, the banking community, which straddles both the over-the-counter market and the exchange-traded market, may well be getting a disproportionate share of the voice the central bank hears.

Other users and stakeholders, such as broking firms that service companies, companies themselves and large trading firms are never heard directly. If the RBI makes a shift and attempts to get feedback from all stakeholders, it may well result in better policy decisions.

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