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Business News/ Markets / Bourses direct brokers to follow RBI circular on currency derivatives

Bourses direct brokers to follow RBI circular on currency derivatives

  • Brokers to place all client currency contracts in square-off mode

Some brokers said the circulars could spell the end of the 16-year-old ETCD as most of those who infuse liquidity into the market act as counterparties to hedgers.

MUMBAI :In late evening circulars stock exchanges NSE and BSE directed their member-brokers to take note of the Reserve Bank of India (RBI) notification of 5 January on hedging of foreign exchange risk, which restricts the use of exchange traded currency derivatives (ETCD) to hedging only from 5 April onwards.

The circulars , according to some brokers, could spell the end of the 16-year-old ETCD as most of those who infuse liquidity into the market—proprietary and retail clients—act as counterparties to hedgers.

"Attention is drawn to RBI notification on ‘Risk Management and Inter-Bank Dealings—Hedging of foreign exchange risk’ dated January 05, 2024. A copy of the same is attached as Annexure," said the NSE circular released late evening on 1 April.

"This is with reference to RBI notification regarding Risk Management and Inter-Bank Dealings—Hedging of foreign exchange risk...Trading Members are requested to take note of the same," read the BSE circular , which annexed the RBI notification like NSE .

After the circulars were issued by the two exchanges, top brokers who offer currency derivatives trading said that they would put clients' forex contract pairs involving rupee on square-off mode from 2 April .

This would enable their clients without underlying forex exposure to only square off , or close out, their existing contracts and not take any incremental exposure.

"We will put all currency derivatives involving the rupee on square-off mode," said Kishore Narne, director, Motilal Oswal Financial Services. "Only clients having underlying exposure will be able to take incremental positions after 5 April. Clients without underlying exposure will be able to only square off (close out) their existing positions."

The major pair involving rupee is the USD-INR contract, followed by Euro-INR, Yen-INR and GBP-INR. The USD-INR contract accounts for over 90% of the 1.46 trillion average daily turnover in FY24. All currency contracts are settled in rupee.

Another broking executive said the use of the terms "valid underlying contracted exposure" in the RBI circular had necessitated putting client positions in square-off mode "as we are not clear on what the terms meant and don't want to fall foul of FEMA rules."

FEMA stands for Foreign Exchange Management Act.

"Since proprietary traders and retail clients make up the bulk of participants on the ETCD, with corporate, FPI and other hedgers being a minority, we have given clients who don't have underlying exposure the facility to square off their positions," he said on condition of anonymity. He added that other brokers offering ETCD would follow suit.

Another broker said RBI had intervened "significantly" in the interbank market and in the ETCD segment since September last year to keep the rupee in a range of 82.5-83.5.

RBI’s 5 January circular said users can take exposure up to $100 million across all contracts involving the rupee, without any existing underlying exposure. However, it adds that exchanges have to inform users that they have to establish the existence of a “valid underlying contracted exposure", which has been not hedged using any other derivatives contract, if required.

Currency derivatives are offered by NSE, BSE and the Metropolitan Stock Exchange.

Though the RBI notification was dated, its import began sinking in among brokers only recently. Broker associations such as Association of National Exchanges Members of India (ANMI) and Commodity Participants Association of India (CPAI) reached out to Securities and Exchange Board of India (Sebi) for a clarification last week as the import of the circular began to sink in.

NSE is the market leader in ETCD, with almost 99% share of turnover. In FY24, average daily turnover on NSE currency derivatives was 1.46 trillion, down 5.8% from FY23.

Apart from equities cash and derivatives segments, exchanges offer currency, commodity and interest rate derivatives.

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