MUMBAI: Giving a temporary relief to forex traders that could lead to significant reduction in the impact cost and cool down the exchange-traded currency derivatives (ETCD) market, the Reserve Bank of India (RBI) on Thursday deferred the implementation of new rules for foreign exchange derivatives to May 3.
The move by the central bank is aimed at giving more time to market participants who could not unwind their currency derivatives positions by April 4 – the earlier deadline set by the central bank, said experts.
In a notification, RBI said that the decision to defer it was taken ‘in view of feedback received and recent developments’.
Said Jamal Mecklai, CEO, Mecklai Financial Services: “The one month extension is reasonable because people have lot of positions and if they all go to square-off tomorrow, the market will go crazy. That’s a good thing.”
The revised rules, which were set to come into effect from April 5, were aimed to ensure that ETCDs can only be used for hedging purposes – a position that has remained consistent over the years and “there is no change in the RBI’s policy approach”, reiterated the notification.
However, the $5trillion-a-day ETCD market witnessed turmoil in the past couple of days after brokers asked clients to submit proof of underlying exposure on their derivative contracts or unwind their existing positions by April 4. The RBI has mandated that traders should compulsorily have an underlying contracted exposure to foreign currency if they want to trade in the currency derivatives segment.
Experts said that there was desperation in the market to unwind their currency derivatives positions but several traders were unable to do so due to lack of liquidity.
“There was still decent open interest left in currency futures and options market. As most of the brokers started informing clients and exiting positions post the exchanges’ circular on April 1, it had made the market one-sided and due to lack of liquidity clients were facing high impact cost,” Abhilash Koikkara, head – forex & Commodities, Nuvama professional clients group, told FE.
Open interest refers to the total number of outstanding derivative contracts of options or futures that have not been settled.
Koikkara explained that this will also help traders who still have positions in April maturity contracts to let the contracts expire if they do not find adequate liquidity to exit.
From the brokers’ side, things had turned very hectic because it was getting difficult to explain to clients and get undertakings from them was also becoming difficult in a short period of time.
Foreign exchange rules permit the use of rupee forex derivatives only for the purpose of hedging a foreign exchange risk both for over-the-counter and exchange traded products, the central bank said.
Regarding the circular, RBI said it sets out the Master Direction and reiterates the regulatory framework for participation in ETCDs involving the Indian rupee without any change. “As hitherto, participants with a valid underlying contracted exposure can continue to enter into ETCDs involving the rupee up to a limit of $ 100 million without having to produce documentary evidence of the underlying exposure,” the RBI said.
Mecklai, however, noted that an interdepartmental group of the RBI did a paper some months ago on the internationalisation of the rupee and it had stated that you should be able to hedge without underlying. “So, it is meaningless in the bigger scheme of things. RBI should have been working on that with the government,” he added.
The regulatory framework for participation in ETCDs involving the Indian rupee is guided by the provisions of the Foreign Exchange Management Act (FEMA), 1999. Regulations mandate that currency derivative contracts involving the rupee – both over-the-counter (OTC) and exchange traded – are permitted only for the purpose of hedging of exposure to foreign exchange rate risks.
RBI also said the regulatory framework has been made more comprehensive in respect of all types of transactions -OTC and exchange traded – under a single master direction to enhance operational efficiency and ease access to foreign exchange derivatives.
Source: The Financial Express