Transaction charges may hit currency volumes

Palak Shah & Ashish Rukhaiyar
Mumbai, 17 August 2011

The exchange-traded currency derivatives market, which boasts of daily volumes in excess of Rs 50,000 crore, is expected to see a dip in the turnover. Market players said arbitrageurs who operate on wafer-thin margins will be affected once exchanges start levying transaction charges.

The National Stock Exchange (NSE), post a directive from the Competition Commission of India (CCI), has already announced that trades in the currency derivatives segment will attract transaction charges from August 22. United Stock Exchange (USE) and MCX Stock Exchange (MCX-SX) is expected to decide on the quantum of charges soon.

“Arbitrageurs were attracted to this segment because of zero charges, which is set to go now,” said a dealer with a domestic entity active in the currency derivatives segment. “Though STT (securities transaction tax) is still not applicable to currency trades, the transaction charges will greatly impact the thin margins. So volumes will obviously take a hit.”

According to market players, entities like SMC Global and Jaypee Capital are among the biggest players in the currency derivatives segment, which offers futures contract in rupee-dollar, rupee-yen, rupee-pound and rupee-euro along with options contracts in rupee-dollar. They further said arbitrageurs in the equity derivatives have almost been forced to shut shop due to high trading costs.

Data compiled by the BS Research Bureau showed the average daily turnover in the currency derivatives segment is in excess of Rs 72,000 crore in August. In July, the daily average was around Rs 50,000 crore.

The segment, which was launched in 2009, saw a gradual increase in volumes as exchanges did not impose any kind of charges in their attempt to attract more players. A bitter fight between NSE and MCX-SX, however, saw the issue being challenged at CCI, which ruled that NSE should impose transaction charges.

“In deference to the order of Competition Commission of India against NSE and without prejudice to the rights and contentions of the exchange in the matter, it has been decided to levy transaction charges in the currency derivatives segment,” the exchange said in a circular last week.

NSE said the members will have to pay between Rs 1 and Rs 1.15 for every Rs 1,00,000 turnover in the currency futures segment. In addition, five paise per lakh will be charged towards NSE investor protection fund trust. On currency option contracts, members will pay a transaction fee between Rs 30 and Rs 40 on every Rs 1,00,000 of premium payable. A premium of Rs 2 per Rs 1,00,000 will go towards investor protection fund.

A senior official from USE said “exchange officials will meet soon to decide on the quantum of transaction charges” for the currency derivatives segment. MCX-SX, which forced NSE to levy charges, has welcomed the move terming it “positive” for the “development of the currency derivatives market”.

A fall in volumes, however, will be bad news for market players who are already bearing the brunt of a growing rupee market in Dubai. The rupee-dollar futures contracts generate daily average trades of around Rs 1,500 crore on DGCX.

Volumes are hitting new records every month and rupee-dollar contracts have become the fastest growing derivative instruments on DGCX with a rise of over 16 times in 2011, compared to last year. The Indian currency contracts account for 60 per cent of the total trading volumes on DGCX and 90 per cent of the overall currency futures segment.