Currency derivatives market can withstand transaction charges

Currency derivatives market can withstand transaction charges

Volumes in the currency derivatives market fell considerably on Monday, after the National Stock Exchange (NSE) and MCX Stock Exchange started charging customers transaction-based fees. Volumes had started declining last week, soon after NSE announced it will start charging transaction fees from 22 August. They fell further when the charges kicked in.

Cumulative volumes of the three exchanges (including United Stock Exchange, or USE) stood at $8.27 billion in the currency futures segment. This is 44% lower than the daily average volumes in the rest of the month. The currency options segment, interestingly, hasn’t been affected yet. Monday’s volumes in the segment were 10% higher compared with the daily average volumes in the rest of the month.

Transaction charges are being imposed for the first time in the three-year history of this market segment, after NSE decided to start charging fees, in deference to an 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, followed suit with similar charges.

Also Read | Mobis Philipose’s earlier columns

Interestingly, among the three exchanges, MCX-SX’s volumes were hit the most. USE is yet to decide on how much it will charge, which gives it the unique positioning of being the only exchange where charges still don’t apply. Its volumes dropped by 28% on Monday compared with the daily average volumes in the rest of the month. NSE, thanks to the high volumes it derives from the options segment, saw a 26% drop in volumes. MCX-SX, which is still awaiting permission from market regulator Securities and Exchange Board of India (Sebi) to launch new segments such as currency options, saw volumes dropping by as much as 56%.

To be sure, it will be foolhardy to jump to conclusions based on volumes of just one trading session. One will get a better picture after the expiry of the current month’s contracts, and an even better one after positions build up by the middle of next month. But there’s little doubt that volumes will get affected because of transaction charges. As pointed out in this column last week, currency traders work on thin spreads and a charge of around Rs100 for every Rs1 crore of transactions means that they would flip trades less often.

It must be noted here that even after the recent drop in activity, total volumes are still at healthy levels. Currency futures volumes at $8.27 billion on Monday were 3% higher than the daily average in the first six months of the current year. And thanks to the pick-up in the options market, currency derivatives volumes at $10.69 billion on Monday were 20% higher than the daily average in the first six months of the current year. Open interest, or outstanding positions, in the market have risen at a much more impressive pace, signifying that exchanges have been able to attract an increasing number of genuine users.

So, though the transaction charges are proving to be a speed bump, the timing is such that it isn’t likely to derail the development of the market.

The state of K.M. Abraham’s mind

According to news reports, Sebi chairman U.K. Sinha has written a letter to the government, which among other things claims that his former colleague and Sebi whole-time member K.M. Abraham “appears to be in a deeply disturbed state of mind, suffering from a persecution complex and delusions that everybody is out to harm him". He also wrote that Abraham’s sense of insecurity got aggravated after a recent probe against him, and that his behaviour had become erratic.

The Financial Express newspaper had an interesting report last week, stating that a section of the finance ministry is worried that Sinha’s statements could get used by companies to appeal Abraham’s orders against them.

It’s interesting to note here that some companies have already preferred to challenge Abraham’s orders in the courts, rather than appeal to the Securities Appellate Tribunal (SAT). According to a securities market expert, this reflects a recognition that the Sebi order is well-argued and well-drafted and may stand little chance of getting overturned by SAT. Abraham’s orders have been among the most coherent and well-investigated orders that have come out of Sebi. His last major order, against two Sahara group companies, came after the above-mentioned probe.

Considering that SAT primarily looks at the soundness of Sebi’s orders and will dismiss other arguments such as doubts about a Sebi member’s state of mind, companies will have no choice but to use such tricks with the courts. It’s important to note here that in one of Abraham’s high-profile orders—Sahara—which went to the Supreme Court, the affected company has already been directed to approach SAT for relief. This is a healthy trend. Such disputes are best settled in SAT, which has much better expertise in understanding and interpreting securities laws.

Sahara has filed a defamation case in a Patna court against Mint’s editor and some reporters over the newspaper’s coverage of the company’s disputes with Sebi. Mint is contesting the case.

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