Some brokerages see sharp unwinding in forex derivatives positions post RBI's diktat

forex derivatives positions

Some brokerages have seen a sharp unwinding of currency derivative positions by clients in the last few days, post the Reserve Bank of India's (RBI)’s clampdown on currency derivative transactions.

At least three brokerage firms Moneycontrol spoke to said there has been a 30-40 percent unwinding in currency derivatives positions over the past two days. They spoke on condition of anonymity.

The RBI’s latest directive on currency derivative transactions will come into effect on April 5. The RBI today deferred the implementing directions on exchange-traded forex derivatives to May 3.

Dealers attributed this trend to confusion among clients, and said that clients do not have the underlying contracted exposure for their derivative contract.

“We have seen around 40 percent reduction in positions from April 3 till today,” an official from a mid-size brokerage firm said on condition of anonymity.

“All my clients have squared their positions. Open interest has fallen by 45 percent in a span of five days, but mostly  in the last two days,” said Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors LLP.

Also read: Will RBI's new currency derivatives norms wipe out most exchange traded volumes?

What did RBI say?

In a circular dated January 5, the central bank said that investors must ensure the existence of a valid underlying contracted exposure which has not been hedged using any other derivative contract, and they should be in a position to establish the same if required.

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  case of remittances.

Brokerages alert clients

A few brokers Moneycontrol spoke to said they have asked clients to submit the underlying latest by 3 pm on April 4, so that the brokerage can comply with the RBI norms.

The exchanges issued circulars to  brokers in this regard on April 1. The brokerages have since started informing traders.

Zerodha has asked its traders to ensure that they close their open positions by April 5, or be compliant with the central bank's directives.

Also, the brokerage has said that effective April 4, traders can exit their current positions in the segment, but will not be allowed to take fresh positions in currencies. And if they wish to take fresh positions, they need to submit the declaration form.

Zerodha's Co-Founder Nithin Kamath has posted on  X (formerly Twitter) that RBI’s directive on currency derivatives will mean the death of the segment on bourses for retail traders.

Also read: Bourses ask brokers to ensure compliance with RBI directive on currency derivatives' trading

Reduction in open interest contracts

Open interest has reduced by around 31 percent between March 27 and April 3. As per NSE’s website, open interest stood at 43,51,803 on April 3, compared to 62,59,762 on March 27.

Open interest is the total number of outstanding derivative contracts for an asset—such as options or futures—that have not been settled.

A dealer with a brokerage firm said that when a client holds either buy or sell positions, it is considered an open position. Whereas, when clients buy and then sell (or vice-versa), it's a closed position.