Daily fx futures limits set to double

Sebi To Raise Small & Large Traders’
Daily Position Limit To $10M & $50M

Ashish Rukhaiyar & Gaurav Pai
MUMBAI
March 17, 2009

INDIVIDUAL traders and brokers may now get much greater exposure to currency futures. Market regulator Sebi is set to double the daily position limit for small traders and larger brokers to $10 million and $50 million, a person familiar with the development said. An announcement on this count is expected in the next few days.

Once operational, the move will help in assuaging the concerns of entities with large foreign currency requirements such as corporations, exporters and importers. For long, they have been complaining that the existing limits come in the way of effectively reducing their foreign currency exposure risks.

NSE, BSE and the Multi Commodity Exchange are the three entities that offer a currency derivatives platform currently. Ahmedabad-based National Multi Commodity Exchange (NMCE) and a group of leading banks are also slated to launch similar platforms for trading of currency futures soon.

“The move should ideally lead to more liquidity and deeper markets, where a player can take increasing exposure without much effect on the prices,” said the head of a debt broking house. “However, not many banks are active in the segment, which has left most of their individual limits unused. So how much improvement doubling limits will lead to, is debatable,” he said.

Present Sebi laws have a restriction on open position at a client level (individual trader) of the greater of 6% of the total open interest (total number of outstanding contracts), or $5 million. For traders, the ceiling is on the gross open positions of $25 million, or 15% of the total open interest.

For banks, however, the gross open position limit is $100 million, or 15% of the total open interest. However, banks are still not active in the segment since they have access to the over-the-counter forex market that is much more efficient.

Since August, when the futures were first launched, daily volumes have gone up from a few million dollars to as much as a billion dollars in early March. But they are still a tiny fraction of the activity in the OTC market, where banks trade with each other through the telephone.

Also, dealers say inadequate volumes on the three currency futures platforms make any meaningful arbitrage difficult, especially since the minimum ticket size on the currency futures bourses of $1,000 is far too small. By doubling daily limits, Sebi hopes to bring greater depth to the market. Greater volumes in the market will also help in bringing banks to the platforms — a move that will improve liquidity considerably.