Indians can now hope to trade in currency futures soon. A panel appointed by the Reserve Bank of India (RBI) has recommended introduction of trading in currency futures in a bid to enable market participants to better manage currency risk exposures.The RBI’s internal working group has suggested setting up of dedicated exchanges for currency futures to ensure that regulatory and supervisory control rests solely with the central bank. The panel has also suggested initially allowing only resident entities to participate in currency futures without any limits. Once the systems are in place, participation of only two categories of residents outside India — foreign institutional investors (FIIs) and non-resident Indians (NRIs) — and that too only as hedgers through designated banks. It has recommended imposition of suitable position limits on FIIs and NRIs. According to the group, a single contract should have a notional value of $1,000 and currency futures maturing in the first 12 calendar months could be offered in the initial phase to encourage proper price discovery and retail participation. While attracting liquidity through product innovation is a feature of the competitive markets, in the initial phase, a standardised product across various exchanges (in terms of contract size, final settlement dates, settlement procedure of contracts, tenors of contracts, etc) would invite greater participation and add to the liquidity of futures markets. This would also discourage situations of unhealthy competition among the exchanges. The group advocated that the ownership of the exchanges must be well diversified. The shareholders and directors must satisfy the “fit and proper” criteria. Foreign direct investment (FDI) should not exceed the limits prescribed for financial infrastructure companies, like in stock exchanges. Additionally, no person would be permitted to hold more than 5 per cent in the equity capital of the currency futures exchange. In stock exchanges, FDI is capped at 26 per cent and a separate ceiling of 25 per cent for FII investments has been stipulated.Given the complications that delivery based settlement entail, and the fact that Indian rupee is not fully convertible on capital account, the group proposed that in the initial phase, settlement only on cash basis based on spot Reserve Bank reference rate on the expiry date may be permitted. The group recommended that the membership may be of two types — hedgers and speculators. The responsibility of fixing of margins for these categories may be left to the exchanges. The group has recommended that when residents outside India (only FIIs and NRIs) are permitted access to the currency futures market, they may be allowed membership as hedgers only.The group, after the study of impact of introduction of currency futures in other emerging markets, has inferred that currency futures market can co-exist with capital control.Managing risk•Dedicated exchanges for currency futures•Initially only resident Indians to be allowed•NRIs and FIIs can be allowed later•A contract should have a notional value of $1,000 •Initially settlement on cash spot basis to be allowed•Two types of members-hedgers and speculators
