RBI rule raises alarm among currency derivatives traders
Arecent directive from the Reserve Bank of India (RBI) on exchange-traded currency derivatives has sent ripples of concern through the market. Brokers and proprietary traders fear that this regulation could effectively sound the death knell for the segment.
According to a 5 January RBI circular, starting 5 April, proprietary traders and retail investors will be 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. Brokers and prop traders have been using the segment to punt on the dollarrupee futures contracts since they were launched in 2008.
The significance of the dated circular is just starting to sink in with proprietary traders and brokers. They are apprehensive that this measure will drain out liquidity from the market, as retail participants and traders predominantly speculate on the direction of the dollarrupee through these contracts. Until now, participants were not required to demonstrate contracted exposure. “The user is allowed to take positions (long or short), without having to establish existence of underlying exposure, up to a single limit of $100 million equivalent across all currency pairs involving INR, put together, and combined across all recognized stock exchanges (NSE, BSE and MSEI offering contracts),’ RBI said in the circular. In the following paragraph, RBI added: “Recognized stock exchanges shall inform users that while they are not required to establish the existence of underlying exposure, they must ensure the existence of a valid underlying contracted exposure which has been not hedged using any other derivative contract and should be in a position to establish the same, if required.”
The note caused a stir among stakeholders as until now, neither underlying exposure nor contracted exposure was required to trade in currency derivatives of stock exchanges.
The maximum position limit for a broker is $100 million for all contracts involving the INR across exchanges. For a client, the maximum exposure is 6% of all open positions, or $20 million, whichever is higher.
When clients are bullish on dollar, they initiate a long position on the dollar-rupee contract, and when bearish, they short a dollar-rupee contract. One contract is equal to $1,000.
"If this clause were to take effect, brokers must alert clients about it, as the onus will be on them to ensure the rule is not violated,” said Jay Prakash Gupta, national vice chairmandesignate of CPAI..