Currency derivatives trading gains momentum

Volumes up 80% from beginning of the financial year

Volumes in the currency derivatives space are up 80 per cent, compared with that at the start of the financial year. So far in March, the average daily volume for all exchanges combined stood at Rs 32,611 crore, compared with Rs 17,012 crore in April 2014. During this period, the open interest, too, has increased four-fold.

Market players attribute the lifting of trading curbs and stability in the currency as reasons for the gradual uptick in volumes seen in 2014-15.

"We have seen a huge build-up of option positions. Regular trading interest in the currency derivatives has improved because of the expansion in the positional limits by the RBI (Reserve Bank of India). Volatility in the currency market has also been low," said Kishore Narne, associate director and head (commodity and currency) at Motilal Oswal Commodity Broker.

In June 2014, RBI set a limit of $10 million per exchange for foreign portfolio investors allowing them to take positions in the currency derivatives segment up to the limit without any underlying exposure.

Currency derivatives is typically used as a risk-management tool by companies and banks to manage their currency exposure.

The rise in limits per exchange means entities can now take exposure of up to $30 million without furnishing any underlying. This has helped improve the currency exposure management to some extent, industry officials added.

“The currency exposure is certainly better managed now, but the hedge ratio has not picked up as much as desired. Corporates should take advantage of the reduced forward premium and put better hedging strategy in place,” said N S Venkatesh, chief financial officer at IDBI Bank.

Further, the low volatility in the Indian rupee against the US dollar has also encouraged traders to opt for different products such as currency options because of attractive pricing.

The rupee has largely held its ground against the greenback this year even as most other currencies have declined sharply. Brokerage firms have also slashed brokerage rates further, pushing trading activity. Experts said the strategy was not adopted by all players but only by those with a substantial presence in the equity and debt trading segment.

“The cost of trading has also been brought down to bring in more trades through the exchange platform. The over-the-counter market is still more popular than the exchange platform at this point,” said Vikas Vaid, product head (commodity and currency) at Prabhudas Lilladher.

According to industry estimates, the cost of trading for large traders could be anywhere between Rs 1 and Rs 5 per lot. For smaller traders, it could start at Rs 10 per lot and go as high as Rs 30 in some cases.

Brokers believe the volumes could grow another 30 per cent from the current levels if further relaxations are provided.

The impediment to this growth could be the cap on the positional limit, which the industry has asked to be raised to $15 million going by the rising activity in the industry. Besides, the documentation process for providing underlying exposure needs to be streamlined across the industry by the regulator.

"The documentation process needs to be simplified in order to get higher positional limits. Right now, there is no uniformity in documentation because there is no clear format given by the regulator," said Hemal Doshi, chief currency strategist at Geojit Comtrade.

Rising interest in currency derivatives
	Average daily turnover (Rs cr)	Change (%)*
Apr-14	17012.14262	11.00
May-14	20660.02517	21.44281662
Jun-14	18352.79563	-11.16760274
Jul-14	20395.41383	11.12973868
Aug-14	24647.27267	20.84713201
Sep-14	22373.55374	-9.225032587
Oct-14	21236.56186	-5.081856437
Nov-14	20171.01726	-5.017500513
Dec-14	24212.46096	20.03589433
Jan-15	34347.00104	41.85671211
Feb-15	26681.4702	-22.31790435
Mar-15	32611.03094	22.2235158
Note: * Change over previous month; Data as on March 27, 2015
Complied by BS Research Bureau
Source: Exchanges