NSE’s Currency Futures - Macro/Finance, NIPFPmacrofinance.nipfp.org.in/PDF/10_4sl_Narain_New_Delhi_March2009... · NSE’s Currency Futures ... OTC vs Futures ... NSE BSE MCX-SX

www.nseindia.com 1

NATIONAL STOCK EXCHANGE

NSE’s Currency FuturesMarch 2009

www.nseindia.com 2

Currency Markets

• OTC For hedging purposes Banks as the counter-party Forwards, swaps and Options Regulated by RBI

• No Exchange traded market• Need to deepen the market• Increased volatility• Need for Exchange traded futures

www.nseindia.com 3

Movement of USD-INR

38

40

42

44

46

48

50

52

54

Jan-

00A

pr-0

0Ju

l-00

Oct

-00

Jan-

01A

pr-0

1Ju

l-01

Oct

-01

Jan-

02A

pr-0

2Ju

l-02

Oct

-02

Jan-

03A

pr-0

3Ju

l-03

Oct

-03

Jan-

04A

pr-0

4Ju

l-04

Oct

-04

Jan-

05A

pr-0

5Ju

l-05

Oct

-05

Jan-

06A

pr-0

6Ju

l-06

Oct

-06

Jan-

07A

pr-0

7Ju

l-07

Oct

-07

Jan-

08A

pr-0

8Ju

l-08

Oct

-08

Jan-

09

RBI reference rate

Nov 7, 2007 : 39.27Mar 5,2009 : 52.06

• Rupee has depreciated by over Rs.7 in past 6 months (around 16%)• Rupee touched an all time low Rs.52.06 on March 05, 2009 in last decade

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OTC vs FuturesOTC Market Exchange Traded Futures

Accessibility Restricted entry Entry not restricted

Price Transparency

Limited access OnlineHigh visibility

Liquidity Depth not known Depth visible

Agreements Customized Standard

Credit Exposure Yes Mitigated through NSCCL

Settlement Physical Delivery Net Settled in INR

Underlying exposure

Required Not required

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Policy framework• Regulatory Framework

• RBI – SEBI Technical committee report• RBI circular• SEBI circular

• All resident individuals permitted • NRIs and FIIs not permitted• Underlying exposure not necessary• Settlement of currency futures – cash settled in

INR• Commenced trading with September 2008 contract

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A break through

• Currency derivatives in equity exchanges• Hitherto, different asset classes in separate silos• ‘First time’ – in many areas

• Joint regulation by SEBI and RBI• Non-equity, asset class with equity derivatives

• Similar front end• Similar margining methods• Similar regulatory, trading and clearing

infrastructure

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Contract specificationsCategory DescriptionUnderlying Rate of exchange between 1

USD and INR

Contract Size USD 1000

Contract Months 12 near calendar months

Expiration Date and Time

Last business day of the month

Min Price fluctuation

0.25 paise or INR 0.0025

Settlement Cash settled in INR on relevant RBI reference rate

Particulars Time lines

Trading Hours 9:00 am to 5:00 pmSettlement ScheduleDaily MTM T+1Final Settlement T+2Funds Pay-in & Pay out

around 08:30 am

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Membership and Operations• Around 520 members • Multiple Banks• Many more in the pipeline• Max traded value: around Rs.3629 cr. (USD 714

mn)• Near month most active• Next three months more active• Tight Bid-ask spreads

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Turnover

0

75000

150000

225000

300000

375000

450000

525000

600000

675000

29-A

ug

8-S

ep

15-S

ep

22-S

ep

29-S

ep

7-O

ct

15-O

ct

22-O

ct

31-O

ct

7-N

ov

17-N

ov

24-N

ov

2-D

ec

10-D

ec

17-D

ec

24-D

ec

1-J

an

9-J

an

16-J

an

23-J

an

2-F

eb

9-F

eb

16-F

eb

24-F

eb

No.

of c

ontra

cts

0

500

1000

1500

2000

2500

3000

3500

Rs. i

n cr

ores

Daily Volumes in contracts

Daily Market Traded Value (RsCrores)

Month Avg. daily traded Value in Rs. crores

Avg. daily traded Value in USD mn

Nov-08 887.17 179.65

Dec-08 1087.62 222.93Jan-09 1198.99 245.05Feb-09 1671.65 337.69Highest volumes of Rs 3629 cr. (714 USD mn) was observed on Mar. 19 ’09

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Number of trades

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

22000

24000

Aug-0

8

Sep-0

8

Oct

-08

Nov-0

8

Dec-

08

Jan-0

9

Feb-0

9

Month Avg. daily tradesNov-08 5803Dec-08 8554Jan-09 11619Feb-09 12659Highest trades of 24366 was observed on Feb. 17 ’09

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Open Interest

0

50000

100000

150000

200000

250000

300000

350000

400000

29-A

ug

10-S

ep

19-S

ep

30-S

ep

13-O

ct

22-O

ct

3-N

ov

12-N

ov

24-N

ov

4-D

ec

16-D

ec

26-D

ec

6-J

an

16-J

an

28-J

an

6-F

eb

17-F

eb

27-F

eb

No.

of

contr

act

s

0

250

500

750

1000

1250

1500

1750

2000

Rs.

in c

rore

s

Daliy Open Interest (incontracts)Daily value of Open Interest (inRs crores)

Month Avg. daily open interest in Rs. crores

Avg. daily open interest in USD mn

Nov-08 746.87 151.43Dec-08 803.05 164.29Jan-09 1057.20 215.78Feb 09 1407.33 284.70Highest open interest of Rs.1786.41 crs (359.79 USD mn) was observed on Feb 17 ’09

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Participants – early experience

16%

17%

23%

44%

Banks

Proprietary

Public & Pvt Co / BodyCorporatesOthers

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Client Position Limits

4.000

8.000

12.000

16.000

20.000

24.000A

ug-0

8

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

In U

SD

Mn

Client Level Limits

Particulars Limit Max LimitClient Level Higher of USD 5

mn or 6% of OIUSD 21 mn for Feb 18

www.nseindia.com 14

20.000

25.000

30.000

35.000

40.000

45.000

50.000

55.000

60.000

8/29/08

9/13/08

9/28/08

10/13/08

10/28/08

11/12/08

11/27/08

12/12/08

12/27/08

1/11/09

1/26/09

2/10/09

2/25/09

TM - Position LimitsParticulars Limit Max LimitTrading Member Higher of USD 25 mn

or 15% of OIUSD 54 mn for Feb 18

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NSE

BSE

MCX-SX

Comparative Volumes and OI

NSE

BSE

MCX-SX

Exchange Average dailyvolumes inUSD mn

% ofmarket share

NSE 247 approx 50%

BSE Negligible NegligibleMCX-SX 247 approx

50%

Exchange Average daily OI inUSD mn

Market share %

NSE 204 61%BSE Negligible NegligibleMCX-SX 128 39%

Traded Volume Open Interest

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Spread distribution

48%

30%

20%

1% 0% 0% 0% 0% 0% 0%0%

10%

20%

30%

40%

50%

60%

0.0025 < 0.005 < 0.01 < 0.02 < 0.03 < 0.04 < 0.05 < 0.1 < 0.25 < 0.5

0%

20%

40%

60%

80%

100%

120%% to total (Feb 09) Cumulative % Futures

Spread Interval NSE: Cumulative % - Futures

OTC: Cumulative % - Forwards

0.0025 48.29% 0.61%

< 0.005 78.40% 11.23%

< 0.01 98.71% 54.87%

< 0.02 99.85% 90.68%

< 0.03 99.92% 99.73%

< 0.04 99.95% 100.00%

< 0.05 99.96% 100.00%

< 0.10 99.98% 100.00%

< 0.25 99.99% 100.00%

< 0.50 100.00% 100.00%

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Impact Cost

Order size : USD 500,000Instances covered : AllOrder Book : Both buy and sellAverage cost : Around 1 to 2 bp90th percentile : Around 3 bp

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Emerging scenario

• Nation-wide participation• Banks doing proprietary trading

Need to increase client business• Multiple exchanges • Good liquidity for

smaller order sizes Near months

• Need for bringing in Depth and Liquidity

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Road ahead – How do we develop?• Range of products

More underlyings – ex. GBP, Yen, Euro Options

• Participants Foreign Institutional Investors

• Need to hedge exposures• Can actively trade resulting in deeper markets

• Limits Need for enhancing the limits Currently at 6% and 15% for clients and TMs Constraints for Corporate Clients Need for increase in the percentages

www.nseindia.com 20

Road ahead – contd…

• Exporters and Importers hedging, though in a small way No physical delivery – an issue Need to Pay Margins Daily Mark to Market payment as a new paradigm Bundled cost vs. segregated cost Position limits are too small

• SMEs may take the benefit• Larger needs of hedging for large corporates• Position limits do not permit

www.nseindia.com 21

Road ahead – contd….• Improvement in Bank participation

Reduces credit risk issues for banks Retains business Reduces the need for Risk weighted capital Helps in handling the physical leg Longer tenures – liquidity

• Education of End users

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