RBI Stresses on Foreign Exchange Exposure for Currency Derivatives

RBI Stresses on Foreign Exchange Exposure for Currency Derivatives/Pixabay

VoM News Desk | April 5, 2024 | 05:28 PM IST | Breaking News | Follow on Google News

RBI Stresses on Foreign Exchange Exposure for Currency Derivatives

RBI Stresses on Foreign Exchange Exposure for Currency Derivatives

RBI’s Long-standing Policy: Governor Shaktikanta Das reaffirms the necessity of underlying foreign exchange exposure for trading in exchange-traded currency derivatives (ETCDs), emphasizing that this policy remains unchanged over the years.

Clarification Amidst Deferral: The RBI’s statement follows a recent deferral of implementing new rules on ETCDs, originally set for today, now postponed to May 3. The central bank underscores the requirement for both proprietary traders and retail investors to demonstrate contracted or anticipated currency exposure for engaging in currency derivatives segments.

Regulatory Framework and Misconceptions: Deputy governor Michael Patra highlights the regulatory framework of the Foreign Exchange Management Act, emphasizing that exchange-traded currency derivatives are designated for hedging purposes only. The RBI’s directive from 2014 permitted positions up to $10 million per exchange without proof of underlying exposure, but it never exempted from the requirement altogether.

Market Impact and Enforcement
The January directive caused concerns in the market, leading brokers to demand proof of underlying exposure or advise clients to close positions. Patra clarifies that relaxation in documentary evidence does not imply no underlying exposure, warning against misconceptions and violations of the law.

Market Landscape and Turnover: ETCDs, jointly regulated by RBI and Sebi, constitute a significant portion of the market, with NSE dominating 99% of turnover. Despite a slight decrease in turnover in FY24, the segment remains vital, catering to various participants, including proprietary traders, retail investors, FPIs, and corporates.

VoM News Desk

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