Open interest in currency derivatives up 44% in Singapore after RBI’s new norms

Currency Derivatives

The aggregate open interest currency derivatives contract on the Singapore Exchange have risen around 44 percent after the Reserve Bank of India’s (RBI) new norms kicked in on May 3.

Experts attribute the sharp increase as a reaction to the Indian banking regulator asking participants to have valid underlying contracted exposure that has not been hedged using any other derivative contract and they be in a position to establish it, if required.

As per Bloomberg data, aggregate open interest contracts on the Singapore exchange stood at 2,62,030 on July 9, around 44 percent higher than 1,82,703 on May 3.

When seen against open interest in April – the start of fiscal year - to now, the growth is around 70 percent, while the jump is exponential, around 4x, if compared with January. On April 1, aggregate open interest contracts stood at 1,54,787.

Also read: Currency-derivatives segment shrinks further by 72% MoM and by 96% since RBI directive made headlines

“The speculative trading activities have shifted from domestic bourses to overseas after regulatory changes. As per the RBI circular, only hedgers are allowed to take forex exposure, compelling the traders/speculators to switch forex positions or segments,” said Dilip Parmar, a foreign exchange analyst at HDFC Securities.

Back home, open interest futures contracts on the National Stock Exchange of India (NSE) have declined 13 percent since May 3. The drop in open interest has been more pronounced in the recent months. On a year-to-date basis, it has declined by 56 percent.

Parmar added that now, exchange-traded currency derivatives have become the hedgers market, which may further reduce the volume at domestic exchanges but increase in overseas bourses.

The RBI on January 5 issued revised rules requiring underlying foreign exchange exposure for transacting in exchange-traded rupee derivatives.

While it did not specify a reason, central bank officials said the Foreign Exchange Management Act says that exchange-traded currency derivatives are only for hedging.

Also read: Investors shift to Singapore after RBI's curbs on local rupee futures

The underlying in derivatives contracts refers to the order bill, or receipt, in the case of exporters and importers, or documents to support the transaction in the case of remittances.

The initial implementation date of the RBI circular was April 5, which was extended to May 3 after concerns were raised about participation in the exchange-traded currency derivatives market.

A dealer with a brokerage firm said this impacts the financials of the government as well as exchanges. This is because all contracts have a Goods and Services Tax of around 18 percent, the Securities and Exchange Board of India also levies some charges and then there are transaction charges and stamp duty, a dealer with a brokerage firm, who did not wish to be named, said.