Mumbai: After the panic in the market earlier this week, the Reserve Bank on Thursday delayed the implementation of its consolidated directions for exchange-traded currency derivatives (ETCDs) by a month to May 3.
The proposed ETCD rules were to come into effect from Friday, April 5.
ETCDs were first introduced in 2008, and the average daily trading volume on dollar/rupee futures been around US$2.5 billion, making it an important segment for the forex market.
The ETCD market went into a tizzy on Wednesday and Thursday -- with volumes plummeting by as much as 80 percent -- after brokers asked clients to submit proof of underlying exposures on their derivative contracts, or else unwind existing positions, according to market participants who feel that the move looks like an extension so that they have time to close out their positions.
"In view of feedback received and recent developments, it has been decided that these directions will now come into effect from May 3, 2024," the Reserve Bank said in a statement late Thursday evening.
The regulator also said it has permitted traders to take positions of up to US$100 million across exchanges without providing documentary evidence to establish the underlying exposures in order to help them. However, RBI ruled out exemption from the requirement of having the exposure.
Though currency derivatives are a tool for hedging forex risks and thus to ensure better profits, they are also a hotbed for speculative trades. There are many ETDs, such as those in stocks, stock index, currency, commodities, and bonds.
An exchange-traded derivative is a standardised financial contract that is traded in stock exchanges in a regulated manner.
ETDs are essentially contracts, deriving value from the price fluctuations of their underlying assets. There are mainly two types of derivatives: one that is subject to standardized terms and conditions, and thus being traded on stock exchanges, and the other being traded between private counter-parties in the absence of a formal intermediary. While the first type is known as exchange-traded derivatives, the other is the over-the-counter derivatives.
According to brokers, proprietary traders and individual investors, accounting for over three-quarters of the volume, will not be able to meet the underlying exposure norm.
According to NSE, which controls more than 90 percent of the currency derivatives volume, corporates accounted for just 3.9 percent of the currency derivatives in February, while foreign investors contributed 6.2 percent and proprietary traders and individual investors controlled 80 percent of the turnover.
