Overall volumes rise as OTC trades shift to exchanges after RBI rule change; smaller firms prefer hedging here.
Options trading in the exchange traded currency futures segment is catching up swiftly. In the past three months, option volumes in currency futures has jumped to 22 per cent of overall volume on the National Stock Exchange (NSE) and United Stock Exchange (USE) combined. In fact, overall volumes in currency futures on the exchanges touched a record high in April.
NSE, with a monopoly in equity derivatives, has cornered a large share of currency option volumes, too. The options trading in equity, the most liquid segment of the domestic market, is currently around 75 per cent of the overall derivative trading, on the back of brokerages pushing several pair and delta hedging strategies to take advantage of the range-bound market.
"The share of options trading in the currency segment is likely to double in the next one year as overall volumes jump. USE's market share, which had dipped, is stably rising," said T S Narayanaswami, managing director and the chief executive officer of USE.
Currency options are derivative instruments that give the buyer of this option a right but not the obligation to execute specified transactions in the underlying currency pair. It gives the buyer the flexibility to execute settlement of options or not. In the domestic market, futures and options contract of rupee-dollar, rupee-yen and rupee-euro are traded. However, since the contracts are cash-settled, companies still have to rely on banks for the underlying basis.
RBI CHANGE
Market players say exchange traded currency segment volumes witnessed a spike due to a shift of trades from the over the counter (OTC) market after the Reserve Bank of India banned small companies, with net worth less than Rs 200 crore and export-import turnover of less than Rs 1,000 crore, from using the OTC market. Apart from NSE and USE, currency futures are also traded on the MCX stock exchange. However, MCX-SX does not trade in currency options; regulatory approval is pending.
"Currency volumes are rising post the RBI guideline. There is a spike in the share of options trading, as clients of large brokers are using different pair strategies to hedge their currency risk. Globally, the average options share is six to 10 per cent of overall volumes. Also, use of algorithm trading in the currency segment is going up," said Saurav Arora, president at USE.
The average daily turnaround in currency futures rose 61 per cent on the NSE from Rs 13,741 crore in January this year to Rs 21,776 crore in April. Of this, Rs 6,000 crore worth of currency options were traded on the NSE in April. On the USE, volumes rose three times from around Rs 2,100 crore to Rs 6,400 during the same period. On the USE, options volumes were Rs 233 crore, relatively less. On MCX-SX, currency futures volumes have been between Rs 16,000 crore and Rs 18,000 crore. While the market share of MCX-SX has been stagnant, as options were not allowed on it, the market share of USE has improved after the RBI guideline and is in the range of 15-20 per cent.
For a small company, it is more beneficial to hedge the currency risk on an exchange, as banks have become strict and ask for letter of credit, supplier consignment or some other form of guarantee for a forward contract, which has to be shown in the full amount. But on an exchange, companies can trade by paying only the margin.
LINKS ABROAD
Apart from India, rupee futures are also traded in Dubai and there is a spike in volumes there, too. Futures contracts of the rupee against the dollar listed on the Dubai Gold & Commodity Exchange (DGCX) have doubled in the first two months of this calendar year. The previous two years saw a five-fold increase in these contracts. Dubai is a major exporter of oil, gold and diamonds to India and the frenzy to hedge against the rupee risk is such that soaring currency trading in the emirate could pose serious competition to volumes on Indian exchanges in the next few years, say market players.
On February 22, the number of rupee-dollar contracts touched a record 12,499 on the DGCX, breaking the previous record of 11,968 on January 5. While there also exists non-deliverable forwards for rupee trading in Singapore, dominated by hedge funds and corporates, precise volumes are not known, as no official data is available. Rough estimates suggest volumes in this market to be in excess of $700 million.
USE fee for currency exchange
“Our market share is 15-20 per cent and we expect it to be 25-plus per cent in the next three months. Currently, there is no revenue model for the currency exchange as we cannot charge a transaction fee but we would start charging a fee by next year if our market share is around 35 per cent, as the business cannot sustain. We are keenly waiting for the Competition commission's order in a complaint filed by MCX-SX against NSE for monopoly practices. The order will definitely give some direction for us to start charging fees,” said T S Narayanaswami, managing director and CEO of United Stock Exchange.
