RBI defers directive for exchange traded currency derivatives to May 3
- Under RBI’s new rules, proprietary traders and retail investors are required to demonstrate contracted or prospective currency exposure to participate in the currency derivatives segments provided by exchanges such as NSE and BSE.
The Reserve Bank of India (RBI) on Thursday deferred implementing its new rules on exchange-traded rupee derivatives by almost a month, saying that the central bank’s policy on this issue has remained unchanged over the years.
“…circular dated 5 January had stated that these comprehensive and consolidated directions shall come into effect from 5 April. In view of feedback received and recent developments, it has been decided that these directions will now come into effect from Friday 3 May,” it said.
Under RBI’s 5 January circular that would have come into effect on 5 April, proprietary traders and retail investors are required to demonstrate contracted or prospective currency exposure to participate in the currency derivatives segments provided by exchanges such as the NSE and the BSE.
Mint reported on 28 March how this directive sent ripples of concern through the market. Brokers and proprietary traders fear that this regulation could effectively sound the death knell for the segment. Exchange-traded currency derivatives are jointly regulated by RBI and Securities and Exchange Board of India (Sebi). Apart from the currency derivatives segment, exchanges offer equities cash and derivatives, interest rate derivatives and commodity derivatives.
On Thursday, RBI said that the regulatory framework for participation in exchange-traded currency derivatives (ETCDs) involving the rupee is guided by the provisions of the Foreign Exchange Management Act (FEMA). Under the guidelines, currency derivative contracts involving the rupee – both over-the-counter (OTC) and exchange-traded – are allowed only for hedging of exposure to foreign exchange rate risks.
RBI added that through a directive in 2014 to improve “ease of doing business”, it permitted users of ETCDs to take positions up to $10 million per exchange without having to provide evidence on the underlying exposure. However, it did not provide any exemption from the requirement of having the exposure altogether, it said.
“Accordingly, users are expected to ensure compliance with the requirement of having underlying exposure. The limit of $10 million per exchange was subsequently amended and currently stands at a single limit of $100 million combined across all exchanges,” said RBI.
Then RBI said on 8 December last year that the regulatory framework on hedging of foreign exchange risks was reviewed in 2020 and based on that and feedback received from market participants since then, the regulatory framework was made more “comprehensive”. The directive of 5 January that alarmed the market was an outcome of this change.
According to RBI, the 5 Jan circular has reiterated “the regulatory framework for participation in ETCDs involving the rupee without any change. As hitherto, participants with a valid underlying contracted exposure can continue to enter into ETCDs involving the rupee up to a limit of $100 million without having to produce documentary evidence of the underlying exposure.”
As per the Mint report cited earlier, although all three exchanges offer currency derivatives trading, NSE leads with almost 99% share, according to Sebi data. Average daily volumes of currency derivatives on the NSE stood at ₹1.46 trillion for the previous fiscal year, down by almost 6% from FY23.
In terms of participants, proprietary traders accounted for 62.3% of gross turnover, followed by retail investors (19%), others (8.3%), foreign portfolio investors or FPIs (6.2%), corporates (3.9%), and domestic institutional investors, or DII, at 0.2%.
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