Queue gets longer for currency futures play

Seven Banks Ally With Chicago Mercantile To Float An Exchange
Reena Zachariah & Ashish Rukhaiyar
MUMBAI
Oct 22, 2008

THE slow and steady rise in the volume of currency derivatives trading in India seems to be attracting more players into this segment. Seven Indian banks have joined hands with the Chicago Mercantile Exchange (CME), the world’s largest diversified financial derivatives exchange, to form a consortium for launching the fourth Indian exchange offering a platform for currency futures.

The clutch of banks including Federal Bank, Canara Bank, Bank of India, Bank of Baroda, Oriental Bank of Commerce, Indian Bank and Andhra Bank have floated a company called the United Stock Exchange that has applied for a licence with the capital market regulator. Banking sources said the group was in talks with more banks to subscribe to the capital of the company.

“We have already met with Sebi officials and the process is on track. We are also in talks with more stateowned and private banks, asking them to join our group,” said a senior banker, who is also a part of the consortium.

A currency future is a derivative contract to exchange one currency for another at a specified date in future. The price at which the transaction is to be settled is the exchange rate prevailing on the last trading date. Typically, one of the currencies involved in the transaction is the US dollar. In India, however, it has so far been an over-the-counter (OTC) market with banks offering these derivative products to companies. The increasing interest by several players to offer exchange-traded currency futures underscores the huge potential in the segment.

Interestingly, the Bangalore Stock Exchange, also wants to be allowed to trade currency futures, according to people familiar with the development. The regional stock exchange, which sees very low volumes of trading, has also initiated talks with banks with this regard.

Banks are the major players in the currency futures market and so most groups are trying to woo them. A senior official of the Bangalore Stock Exchange confirmed the development while refusing to share further details. Representatives of both the consortia have already met with Sebi officials.

Sebi officials confirmed that representatives of the two consortia have met them and approval would be given if they fulfil the eligibility criteria. Sebi has been articulate about the fact that they would encourage more competition, and would approve any entity that would approach them, if they fulfil the stated criteria.

The RBI-Sebi joint committee that was formed to frame guidelines for currency derivatives laid down two key criteria for exchanges willing to launch currency futures — a nationwide presence and a balance sheet networth of at least Rs 100 crore. The guidelines also require entities to have robust surveillance systems to monitor positions, prices and volumes on a real time basis.

Currently, the National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and MCX are the three entities that offer a platform to trade currency derivatives. NSE was the first Indian exchange to offer this platform, doing so in August. According to industry players, Ahmedabad-based National Multi Commodity Exchange (NMCE) is also planning to launch the currency futures segment.