Forex futures may have longer trading hours to allow traders to align positions with US markets

Currency futures, a paradise for traders, punters and corporates looking to cover exchange rate risks, could be in for a greater play in coming days.

The regulatory authority has sought the views of bourses, on which currency futures are traded, on a possible extension of trading hours, participation by offshore fund managers and raising or even freeing up the exposure limit for companies.

Like stock futures traded in stock exchanges, this is a market where individuals as well as companies with foreign exchange exposure – like export receivables, import payable and cheaper dollar loans – can take positions by either going long or short the dollar against the rupee.

And, as in stock futures, these are leveraged positions where a fraction of the exposure amount is chipped in as margin.

Currency futures are traded on platforms offered by exchanges like NSE, BSE, MCX-SX, and United Stock Exchange.

At present, the trading hours are from 9 am to 5 pm. Longer hours would enable traders in India to adjust and alter their positions in line with the movements in the US market. “Also, many traders who take positions in overseas commodity exchanges like Chicago Mercantile, and take counterpositions in India are exposed to risk arising out of dollar fluctuation. These traders often hedge their positions in the Dubai exchange.

But, if an exchange in India offers currency futures trading platform till late evening, say up to 8 or 9pm, the hedging can take place here. This will be simpler operationally as well as from the compliance point,” said a person familiar with the development.

Capital market regulator Sebi has had a discussion on the subject with some of the exchanges, following which they have been asked to formally share their views a few days ago.

In 2010, stock market timing was increased by advancing the opening to 9 am from 10 am. “But this did not translate into higher trading volumes. Traders found it stressful. But longer currency hours in the evening could help different pockets of the market, particularly commodity traders,” said a currency dealer. It’s also learnt that the regulator may allow foreign institutional investors to cash settle their position in currency futures.

Initially, it was felt that futures positions of these overseas funds should result in actual delivery of dollars. However, a few bourses have suggested that settlement in cash — as applicable for all local entities — should be extended to FIIs as well.

The presence of FIIs would make the market deep enough for large corporates to hedge their exchange rate risks with currency futures. The regulator is understood to be considering a proposal to relax the $10 million cap applicable for companies (irrespective of size) taking currency futures position; as per discussions held the exposure limit could be linked to their export or trade commitment.

Many perceive that hedging — or covering the risk of forex movements — can be less expensive in an exchange than buying or selling forward dollars with a bank in the regular and much larger over the counter (OTC) market. Close to Rs16,000 crore worth currency futures contracts — just a tenth of the OTC market volumes — are traded daily on Indian exchanges.

In a currency futures exchange, a small firm as well as a large corporate are offered the same rate, unlike in the less transparent OTC market where a bank may quote a better rate to a bigger client that generates other businesses.

Unlike the OTC market where a forward position can be taken only against an actual underlying (like exports, imports or dollar liability), positions in currency futures require no such underlying. But what may have kept away many small companies from currency futures is the need to monitor their margins with the intermediary on a daily basis and the compulsion to replenish margins if the market goes against it.