Sebi considers proposal on cross-currency futures pairs

MUMBAI: Punters could soon get to trade in cross-currency futures pairs at a much cheaper cost on local bourses. Capital market regulator the Securities and Exchange Board of India (Sebi), which regulates currency derivatives jointly with the Reserve Bank of India (RBI), is mulling a proposal by stock exchanges to offer these pairs in addition to dollar- and eurorupee futures they currently offer.

"We are considering the proposal as we want to introduce new products and are in discussions with the RBI," said a regulatory official aware of the development. "Once the central bank approves it, exchanges could launch cross-currency pairs like dollar-euro, dollar-pound and dollar-yen."

Currency derivatives were launched first on NSE and the erstwhile MCX Stock Exchange, now MSEI, in 2008. Currently, punters can take a view on how the rupee will move against the dollar, euro, yen and pound on bourses like NSE, BSE and MSEI.

Currency brokers like Suresh Nair, director at Admisi Forex, said, if allowed, the move would reduce one leg of a transaction for traders and reduce transaction costs.

For instance, if one has a view that the dollar would rise against the euro, currently she has to sell the rupee and buy the dollar, or go long dollar-rupee. In the second leg she sells the euro and buys the rupee, effectively making her long dollar and short euro.

If bourses launch new cross-currency pairs, a trader who feels the dollar would rise versus the euro could simply go long dollar and short euro. This will save her brokerage on the extra leg and reduce transaction costs, too.

"At times it has been observed that the dollar, while not exhibiting much movement against the rupee, moves sharply against the euro or the yen. If one wants to take a future view on the dollar-euro or dollar-yen, they would have to either long/short dollar-rupee and short/long euro-rupee. If indeed the RBI permits new cross-currency pairs for being traded, it will increase interest in currency derivatives and raise the combined turnover of all the exchanges," said Harish Galipelli, head of currency at Inditrade Derivatives & Commodities.

While regulators approved currency derivatives primarily to offer an alternate and cheaper hedging option, than the OTC market, to small and medium scale industry, brokers say, it has been largely a speculative play, with proprietary trades accounting for almost 60 per cent of turnover.

Jamal Mecklai, CEO of Mecklai Financial, a forex consultancy, attributes this to an SME having to eventually convert its forex inflow or outflow with an authorise dealer (bank), where it might not get as attractive a rate it does for hedging in the futures market. Besides, on the futures market liquidity is restricted to the front and the next month contracts; far month contracts being relatively less traded. "Cross-currency futures will probably attract more punters than genuine users as the current experience proves," added Mecklai.

In the week through Friday, combined currency derivatives turnover of NSE, BSE and MSEI (erstwhile MCX-SX) was Rs 1.22 lakh crore. NSE led with a market share of around 62 per cent, BSE at 32.5 per cent and MSEI the rest.