RBI, Sebi clear decks for trading in currency futures

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The Reserve Bank of India, or RBI, has released guidelines for exchange-traded currency futures. Now banks will need RBI nod to participate in forex futures.

The size of each contract is to be USD 1,000. Contracts will be quoted and settled in rupees. Maturity of contracts will not exceed 12 months. The settlement price will be the RBI reference rate on the last trading day.

Meanwhile, the Securities and Exchange Board of India, or Sebi, has also released rules on exchange-traded currency futures. The qualifications for exchanges, product design is as per the May 29 report. Trading members, clearing members will however need prior Sebi approval.

According to CNBC-TV18�s Latha Venkatesh, there is now an additional asset class for the common man as one can take positions on currencies through currency futures. The only thing that now remains is for exchanges to offer and design their products as the guidelines are already in place. They were put on the Sebi website on May 29 and on the RBI website.

The product has to be designed according to the specification laid down, and put a surveillance mechanism in place. They then need Sebi clearance. If Sebi is satisfied, the product is okayed, and one can start trading. This might happen in a few months.

The dollar-rupee, however, will still be determined by the Over-the-Counter market. By corporates getting their products through banks, it is not as if the dollar-rupee exchanged rate will be greatly influenced by the currency futures market.

The most important point to note is the speed in which this product has bee launched. It is a great product as it ushers capital accountability. One would not have thought that in turbulent times like these, when the markets are trying to find stability in every asset class, a product like this would be launched by RBI, which is normally seen as conservative.

This step happened because of cooperation on this product between RBI and Sebi, and the great amount of confidence that the heads of these two regulatory bodies have in one another.

Commenting on this move, CB Bhave, Chairman, Sebi, said, �The participation of banks is important to make exchange-traded currency futures meaningful. By allowing banks to take part in this, RBI has given the necessary push to this product."

This is a very important compliment coming from one regulator to another and underscores the fact that there has been a lot of cooperation on this. Banks will be the key to this. Their gross open positions can be to the extent of USD 100 million, whereas other trading members like a brokerage firm will have a trading limit of USD 25 million. Banks themselves have a limit as to their net capital market open positions. This is a rule of thumb. At the moment, it is 25% of their networth. Whatever open positions they take in currency markets or currency futures will have to be within this overall position limit. So, the product will get a life. It will be meaningfully launched as and when the exchanges are ready.

Ravi Narain, MD, National Stock Exchange, or NSE, said the exchange is fully ready to launch currency futures. The membership drive for currency futures has begun. It will launch currency futures when adequate members join.

Excerpts from CNBC-TV18's exclusive interview with Ravi Narain:

Q: The regulators have really put the guidelines in place but how prepared is the exchange part of the business, how prepared is the NSE?

A: The systems at NSE are fully ready and we have recently commenced the membership drive. As soon as we have enough members ready to go live, we should be in a position to launch currency trading. The members require a little bit of paper work to be done, especially the banks who will still need to go back and take approval one by one, so we will start sort of pushing that from tomorrow morning.

Q: Is there a timeline as to when you expect this to go live?

A: We are absolutely ready, but the members have to come on board one by one and there is a requirement that a decent number of them ought to be ready to go live. So starting tomorrow morning we will start pushing that. I should not imagine that it would take too long for most of them to come on board. But as I said, the regulation requires the banks to take approval one at a time. So some amount of paperwork is left at the member end, which has to be still completed.

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