FAQ - Currency Derivatives
Can Banks trade on a Currency Futures Exchange?
Banks are allowed by the Reserve Bank of India to participate in the currency futures market.
The AD Category 1 banks that fulfill the regulatory requirements are eligible to become
clearing members and/or trading members on USE. All other banks can participate in the
futures trading as clients only.
Are there international exchanges also dealing in currency futures?
Currency is the most liquid asset class amongst all underlying assets globally. Chicago
Mercantile Exchange (CME), Euronext, LIFFE, Tokyo Financial Exchange are a few of the
many exchanges that trade in currency futures.
How does the Indian Forex Market Work?
The Indian Forex market is regulated by the Foreign Exchange Management Act, 1999. The
regulatory authority for the Indian Forex market is the Reserve Bank of India (RBI). However
the Exchange traded currency futures market is regulated by SEBI through recognized stock
exchanges based on the rules specified in the RBI-SEBI Standing Technical Committee Report
on Exchange Traded Currency Futures.
Why trade in currency futures?
A currency futures contract allows for three things:
Participants with exposure in currency can use futures to manage risk arising from
unfavorable exchange rate movements
Participants with a view on the Forex market can trade futures to profit from these views,
just like stocks or commodities or any other asset class
Entities with access to both Exchange traded Futures and OTC markets, or different
exchanges can exploit arbitrage arising due to pricing differences
What are currency futures?
Currency Futures are standardized contracts to buy or sell a currency at a future date at a
rate determined in advance. The contracts are traded on regulated exchanges in accordance
with the guidelines specified in the RBI-SEBI Standing Technical Committee Report on
Exchange Traded Currency Futures, 2008
What are the advantages of trading on an exchange as compared to OTC markets?
Exchanges offer many benefits as compared to OTC markets. These are:
Contract Size: In a currency exchange, the contract size is small, with lot size of USD1000.It
hence allows small participants to enter and hedge their currency risk.
Transaction Cost: The transaction cost in this market is lower than in other markets.
Increased liquidity will bring the impact cost to a marginal value.
Price Transparency: Efficient price transparency mechanisms exist in a currency futures
exchange ensuring same prices for all participants.
Underlying Exposure: It is not necessary to have underlying exposure to trade in this market.
Default Risk: Trading on currency futures exchange gives a guarantee for settlement. There
is a clearing corporation to guarantee the pay-in/pay-out of funds.
Leverage: The margins requirements are low. Also, since the profits or losses are collected /
paid on a daily basis, the scope for building up of the mark to market losses in participants’
books is limited.
How is effective and efficient settlement ensured?
A clearing house is employed to act as counterparty to each trade. The trading in currency
futures requires maintenance of initial, extreme loss and calendar spread margins with the
clearing corporations. The initial margins are deducted from the liquid net worth of the
clearing member on an online, real time basis.
Who can become a member of the exchange?
Any Resident Indian or Company can become a member on the exchange and trade in the
currency futures market. At present Non-Resident Indians (NRIs) and Foreign Institutional
Investors (FIIs) are not permitted to trade in futures market in India.
What are the trading hours at USE?
The trading in Currency Futures at present takes place between 9:00 am to 5:00 pm on all
working days from Monday to Friday.
What is the last trading day for the currency futures?
Futures Contracts can be traded until two working days prior to the last working day of the
month (excluding Saturdays). Reserve Bank of India’s reference rate on the last trading day is
used as the settlement price. E.g. the contract expiring on 29thMay, 2009 (Friday) were
settled on 27th May, 2009 (Wednesday)