Exchange-Traded FX Derivatives May Be Hit By New RBI Regulation
India’s central bank is said to have confirmed that exchange-traded currency derivative contracts linked to the rupee can only be offered for hedging purposes after confusion that unhedged trades were allowed for positions below $100 million.
(Bloomberg) -- India’s central bank is said to have confirmed that exchange-traded currency derivative contracts linked to the rupee can only be offered for hedging purposes after confusion that unhedged trades were allowed for positions below $100 million.
The regulator clarified to the Commodity Participants Association of India in a March 28 email that anyone undertaking such contracts involving the rupee without an underlying exposure would be in violation of foreign exchange rules, according to people familiar with the matter. They asked not to be identified as the email isn’t public.
The CPAI had written to the Reserve Bank of India seeking clarification on its Jan. 5 circular that said stock exchanges may offer contracts for the “purpose of hedging contracted exposure.”
The circular stated that positions up to $100 million are allowed without having to establish underlying exposure across all currency pairs involving the rupee and combined across all stock exchanges. Still, those entering exchange-traded currency derivative, or ETCD, contracts must show proof of a corresponding unhedged exposure if asked.
The move could potentially lead to a large loss of volume in a growing segment of the nation’s foreign exchange market. Brokers in the currency futures sector say speculators and arbitragers form a large part of the market and the current understanding was that underlying exposure wasn’t required for trades up to $100 million.
The central bank’s original rules in 2008 said ETCD contracts can be undertaken to “hedge an exposure to foreign exchange rate risk or otherwise.” The central bank in its clarification said the rules were revised in 2014, according to the people.
The new rules come into effect on April 5.
The RBI didn’t immediately respond to a emailed request for comment outside of normal business hours.
“We genuinely feel derivatives market includes many, including hedgers, speculators and arbitragers,” said CPAI President Narinder Wadhwa. “We are in talks with the authorities including RBI, SEBI and the finance ministry,” he said. SEBI is the Securities and Exchange Board of India.
Average daily turnover in currency futures stood at 412.9 billion rupees ($5 billion) in FY23 compared with 102.9 billion rupees in FY17, National Stock Exchange of India data showed. The daily average in FY24 dropped to 296.3 billion rupees, based on data till the end of February.
The rupee has been among the least volatile emerging market currencies, with the RBI expending its reserves when needed to prevent any sharp depreciation. The RBI has built a record $643 billion of reserves as it soaked up inflows into the nation’s bond and currency markets.
--With assistance from Anup Roy.
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