HYDERABAD: Come August, individual investors can directly buy and sell foreign currencies, much like they do with equity stocks. Currently, retail investors trade foreign exchange (forex) via an authorised dealer bank at a cost 1-2 per cent higher than market prices.
Though some electronic platforms of banks and multi-bank portals allow retail investors to trade directly, it is limited to a minimum order size. Authorised dealer banks are free to determine the charges on forex transactions, subject to RBI’s guidelines that stipulate: 1) banks should ensure that the charges are reasonable and are not out of line with the average cost of providing services; 2) they are in line with the FX Global Code — developed by market participants and a pool of 16 central banks including RBI — that allows banks to include a Markup, spread or charge towards the final transaction price, provided it’s fair and reasonable. Banks also have to ensure that customers with a low volume are not penalised.
However, with customers raising pricing concerns, the RBI hopes that they will be put to rest once the proposed electronic trading platform goes live in August. The central bank is expected to issue operational guidelines this month.
Initially, the facility will be available only for US dollars, but more currencies will be added gradually. The minimum order is $1,000 with multiples of $500 thereof, while the maximum order size is $500,000.
Forex market is broadly divided into two: inter-bank and retail segment.
The participants in the inter-bank segment are banks (authorised under FEMA, 1999) and transactions are conducted through trading platforms like Thomson Reuters, Clearing Corporation of India Ltd (CCIL) before being settled by CCIL for cash, TOM, SPOT and forward USD-INR transactions. Banks also fix card rates for various forex pairs at the beginning of the day, when purchases and sales from/to retail customers are made regardless of the intraday movement of the currency.
Authorised dealers Category-1 banks may access both inter-bank and retail markets, but retail customers can access only retail market for trade during market hours between 9 am and 5 pm.
How does it work?
An electronic trading platform, where bid/offers from customers and authorised dealer banks can be matched anonymously and automatically for transparency while enhancing competition, leads to better pricing for all types of customers without differentiating them on the basis of order size. It eliminates price risk faced by banks in warehousing customer orders until they are aggregated and covered in the inter-bank market.
Buy orders on the retail platform will be matched against sell orders and vice versa. It will aggregate customer orders at the same rate, up to the minimum lot size of the inter-bank market, and match it with the orders in the inter-bank market to ensure unanimity.
Each matched trade will result in two transactions: one, between the customer and its bank; and another between the customer’s bank and the counter-party bank, which will be settled as per the current CCIL settlement process, while the customer deal will be settled bilaterally between the bank and customer.
Direct execution by the customer will reduce transaction cost as there is no market risk to the customer’s bank, but may charge customers a fee towards processing expenses and publicly declare such fee.