The Securities and Exchanges Board of India (Sebi) has allowed exchanges to introduce currency options on US dollar pairing with rupee, providing another alternative to corporates for hedging against currency fluctuations. In another move, it also asked stock brokers, FIIs, asset management companies to report all over-the-counter transactions made by them in commercial papers (CP) and deposit certificates (CD) from August 16 to make these transactions more transparent.
“It has now been decided to permit introduction of options on USD-INR spot rate on currency derivatives segment of stock exchanges,” Sebi said in a circular. According to the circular, only dollar-rupee contracts of size $1,000 would be allowed. With this, now exchanges like NSE and MCX will have to seek regulatory approval, following which they would go live.
Currency option is a derivative instrument that gives the owner the right, but not the obligation, to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. As per the Sebi guidelines, the trading in currency options will be from 9 am to 5 pm.
TS Narayanasami, CEO, United Stock Exchange, said, “We welcome this move by the regulators. Introduction of currency options has been long awaited by the market and is definitely a step in the right direction. Currency option is primarily a retail product and we expect corporates and SMEs to enter this market in a big way by hedging their forex risk at minimal cost.”
In August 2008, Sebi allowed stock exchanges to introduce currency futures – a forex derivative contract to buy or sell one currency against other on a specified future date, at a price decided in the contract. Initially, the currency futures were limited to rupee-dollar only. But in January 2010, it was extended to three more currencies – euro, pound and yen – pairing with rupee. The RBI and the Sebi jointly regulate these products. While RBI approves the products, Sebi decides on the trading platforms.
Market players have to report their transactions in CP and CD on a platform of Fixed Income Money Market and Derivatives Association of India (FIMMDA). “It has now been decided that all Sebi Regulated entities shall report their over-the-counter (OTC) transactions in certificate of deposit (CDs) and commercial paper (CPs) on the FIMMDA reporting platform within 15 minutes of the trade for online dissemination of market information with effect from August 16, 2010,” the Sebi said in a circular.
Detailed guidelines on the matter will be issued by FIMMDA, it added. “This circular is issued to protect the interests of investors in securities and to promote the development of, and to regulate the securities market,” it said. The Reserve Bank had earlier asked FIMMDA to set up a retporting platform to include all OTC transactions in CD and CP.
