The United Stock Exchange of India Ltd (USE) is set to take on the National Stock Exchange (NSE) and the MCX Stock Exchange in the currency segment. Headed by veteran banker T S Narayanaswami, the exchange plans to go live in July. The exchange is leveraging the strength of its promoters — 25 banks and New Delhi-based Jaypee Capital —to mobilise volumes. In an interview with Palak Shah, Narayanaswami shares his strategy on putting up a strong competition. Edited excerpts:
When will you go live with currency trading? Being a late entrant, how will you tackle competition from NSE and MCX-SX?
USE recently got authorisation from the Reserve Bank of India. We will go live in July and a date will be announced soon. With 21 public sector banks, four private sector ones, and three corporate institutions as shareholders, USE has a unique advantage that can help it build a liquid platform. The quality and integrity of USE shareholders will ensure a safe and reliable environment for its members to manage their risks and seamlessly settle trades. We are looking at expanding the market; already, participants who are not members of the currency segment at any other exchange are becoming our members. Many exporters, importers and companies have shown keen interest in hedging their currency risks through USE.
The segment is new to India and so competition will help generate more volumes. Much of the trades in this segment are proprietary in nature, as awareness among small businessmen is low. The over-the-counter currency market is still strong. An exporter in a small town will always go to a bank for a forward cover, without knowing that he can get better rates on the exchange. We are creating awareness about currency trading, which will help us build volumes. On the proprietary side, too, there was an apprehension among dealers about trading currency on exchanges, as they feared that they would have to book losses. We have noticed during our awareness and membership drive that dealers have become more conversant.
How will you differentiate USE from other exchanges? What will be your strategy on product innovation?
USE is different from other exchanges because of a unique business model, a first-of-its-kind in this space. It is for the first time that so many banks have come together to participate in creating a new institution. Liquidity will not be an issue on USE. Combining resources and expertise of 25 domestic banks is an exciting step. Having banks and large players like Jaypee Capital, which generates around 30 per cent volumes in the currency segment, gives us a reasonable sense of optimism. We will ensure that banks get the comfort of trading in currency on our exchange. Once they become more active, volumes will improve, which will lead to effective price discovery. On the products side, the strategy is to keep things simple and not confuse traders. The priority will be to get currency options.
What is the scope of a standalone currency exchange? What will be your break-even in terms of volumes?
Currency is one of the largest traded instruments. Forex trading is a $3.8-trillion market worldwide and in India, we have just been able to achieve $40 billion, the tip of the iceberg. The daily turnover of exchange-traded currency futures in December 2009 was $4 billion, in February this year, it was around $6 billion, and now it averages over $8 billion. These figures speak for themselves and show the tremendous opportunity this market has. Once options are launched, we will see increased participation.
When volumes rise, there is a case to levy transaction charges, which others are not charging currently, as they have revenue backing from other verticals. Exchanges cannot be left to bleed due to competition. If USE is able to increase volumes and provide effective price discovery, traders will not mind paying a small transaction charge. There is no break-even point for volumes, provided effective price discovery is the motive.
How many members have shown interest in USE?
We have reached 1,200 participants though our member-training workshops and pan-India roadshows. The response has been encouraging. Over 300 members have shown interest -- banks, brokers, exporters, importers, stock brokers, hedgers, companies. Getting enrolled as members of exchanges was easier a few years ago for traders. They did not have to pass any test then. Also, now, sub-brokers with one exchange cannot become members of another exchange. To begin with 200 members, working against all odds, is a major step for a start-up exchange. We are not charging any membership fee at present.
