New $100 million limit to give NSE the edge in currency derivatives

Traders keen on liquidity are likely to migrate to NSE, cost conscious ones may move to BSE

The decision of the Securities and Exchange Board of India (Sebi) to raise the currency derivatives limit to $100 million from $45 million is likely to boost the currency derivatives market and give the National Stock Exchange of India (NSE) an edge in the segment.

Earlier, trading in currency derivatives had a limit of $15 million per exchange per client, enabling trades to be spread across exchanges. The limit has now been raised to $100 million without any specified limit for each of these exchanges.

“It will deepen the market because limits are now fungible across all exchanges. This will bring in large corporates and FPIs (foreign portfolio investors) who shy away because of low limits,” said Anindya Banerjee, currency analyst at Kotak Securities. At present, the participation is restricted mostly to micro, small and medium enterprises (MSMEs) and arbitrageurs.

Traders keen on liquidity are likely to migrate to the NSE, while cost-conscious investors may move to the BSE, experts said. The move is likely to be negative for the MSEI.

“The NSE has better liquidity than other exchanges, especially on options contracts. However, transaction charges on the BSE are 70-80 per cent lower than that on the NSE. So, volumes could shift either ways depending on the preferences of traders. The MSEI, though, will be the clear loser,” said Kishore Narne, head of commodities and currencies at Motilal Oswal.

“There are several initiatives and roll-outs lined up from our end and we are sure we will make the most of the market expansion reforms undertaken by the authorities,” said MSEI in an email response.

The daily average turnover for currency derivatives on the BSE in the last six months stood at Rs 193 billion compared with Rs 221 billion on the NSE. MSEI did a daily average turnover of Rs 3.8 billion during the period.

“The single increased position limit across currency pairs will provide flexibility to traders and hedgers in any currency derivatives without the need for establishing the underlying exposure within the limit of $100 million. Better liquidity in these currency pairs will bring more users and hedgers to the exchange platforms,” the NSE said. The BSE declined to comment.

Some experts said traders would have to take into account the total cost of execution on the exchanges, which includes both the implicit and explicit costs.

While the explicit cost includes charges such as exchange turnover fees, the implicit cost takes into account factors such as the bid ask spread and the impact cost which essentially depends on the overall liquidity.

“Often, liquidity or rather the lack of it can play a huge role in deciding the exchange on which one trades on. Considering that the liquidity on the NSE is better than other exchanges at this point, volumes are likely to shift there over a period of time. Ultimately, it will be a game where the winner takes it all,” said Banerjee.

For currency futures transaction on the BSE, the fees start at Rs 22 per crore of traded value for incremental monthly turnover in excess of Rs 50 billion. The charges fall to Rs 16.5 if the turnover is between Rs 50 billion and Rs 100 billion and Rs 11 for turnover of Rs 100-200 billion. For currency options, a flat charge of Rs 100 per crore is applicable on the premium value. For the NSE, the fees start at Rs 90 per crore of traded value for incremental monthly turnover of up to Rs 10 billion in the currency futures and declines with an increase in turnover.

The currency derivatives segments of exchanges allow trading in currency futures on four currency pairs — rupee against the dollar, Japanese yen, pound and euro.