MUMBAI: After the panic in the market earlier this week which saw a near wipe-out of volume, the Reserve Bank on Thursday delayed implementation of its 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 nearly $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% after brokers asked clients to submit proof of underlying exposures on their derivative contracts, 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 this evening. The regulator also said to help traders it has permitted them to take positions of up to $100 million across exchanges without providing documentary evidence to establish the underlying exposures. 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.