Tehelka Magazine, Vol 7, Issue 19, Dated May 15, 2010
|BUSINESS & ECONOMY
The currency bazaar could soon outpace the
equity derivatives, says SHANTANU GUHA RAY
|Big volumes Currency constitutes over 60 percent of the global trading volumes
Photo : Reuters
ANJANI SINHA, CEO and MD of the
Mumbai-based National Spot
Exchange, calls it the market’s
new miracle. He is referring to
the daily trading volumes in the currency
market that many predict may soon
outpace volumes in equity derivatives.
The currency futures segment was introduced
just two years ago.
According to Sinha what’s driving the
currency derivatives pie are safe volumes.
Indeed, ever since the Reserve Bank of
India (RBI) okayed currency derivatives
trading, the daily average volumes in the
currency market have skyrocketed.
32 percent rise in the currency
MCX-SX controls 60 percent of
the trading against NSE’s 40
Equity derivatives declined by
5 percent in Jan-April, 2010
Daily global currency turnover
at $4.0 trillion in April, 2010
Indians can trade in four pairs
of currency on two exchanges
The currency option is a derivative
instrument that guarantees the owner the
right — though it’s not an obligation — to
exchange money denominated in one
currency into another at a pre-agreed
exchange rate on a specified date.
The figures for the first three months
of this year alone are revealing. On an
average, daily volumes in currency futures
surged nearly 40 percent on both the
Multi Commodities Exchange (MCX-SX)
and the National Stock Exchange (NSE)—
both fierce competitors. But compare this
with the equity derivatives, and it would
look like a joke. Volumes in equity derivatives
on the NSE declined around 5 percent
between January and March.
And the figures will only grow bigger
for a nation where only 2.3 percent invest
in the bourses. In fact, senior market analyst
Hemen Kapadia says he is supremely
confident that the currency market will
overtake the equity market in one year
flat. “India is following a global trend
where trading in currencies dominates
commodities and equities,” says Kapadia.
|Battlelines MCX-SX’s Jignesh Shah (right) and NSE MD Ravi Narain are seeking a larger slice of the market
The figures prove his contention. The
global foreign exchange market is on a fast
track, with daily turnover surging from
$500 billion in 1988 to $4.0 trillion in
April, 2010. What’s more, globally, currency constitutes over 60 percent of trading
volumes and is the world’s largest
investment market, followed by the commodities
market and equities.
Kapadia says the 32 percent jump in
the exchange-traded currency derivatives
market was due to the introduction of
three new currency futures in euro-rupee,
yen-rupee and pound-rupee. “This is a
great investment alternative for cautious
Indians,” he adds.
So now the country’s central bank, the
Reserve Bank of India (RBI), plans to push
simple vanilla options in the dollar-rupee
pair — which will only boost investments
in currency derivatives. “Recognised stock
exchanges will be permitted to introduce
plain-vanilla currency options on the spot
US dollar/rupee exchange rate for residents,” the central bank said in its annual
policy statement last month.
“The introduction of options trading
will lead to further deepening of the
market. An additional instrument will be
available to companies as well as importers
and exporters,” remarked Nandkumar
Surti, chief investment officer, JP
Morgan AMC. Currently, Indians are
permitted to trade in futures contracts in
four currency pairs on the two exchanges.
Experts say the advantage of options
trading in the currency market is that,
while it gives buyers the right to exercise
it, there is no obligation involved. It is also
considered a cheaper hedging tool compared
to futures. In the futures market, an
investor pays mark-to-market difference.
|CURRENCY TRADING IS A
GREAT INVESTMENT OPTION
FOR CAUTIOUS INVESTORS
In options, the risk is confined to the paid premium. Pramit Brahmbhatt, CEO,
Alpari India, agrees. “The commodity
markets in India took more than five years
to reach this volume. But the way the currency
market is growing, it won’t be surprising
if it overtakes the equity market.”
And it is this very growth which is
helping the bosses at MCX-SX which,
despite being a late entrant, has now overtaken
the NSE as the largest player in the
business with a dominating 56 percent
share for the last three months. MCX-SX
has had some great daily volumes touching 38,58,460 during February-April, as
against NSE’s average daily volumes of
33,03,908. Troubled, the NSE recently
waived the transaction fee on currency
derivatives, forcing MCX-SX to do the same.
This led to MCX-SX complaining to the
Competition Commission of India (CCI)
that ordered an investigation into whether
NSE was misusing its position.
BUT TENSIONS aside, the Securities
and Exchange Board of India
(SEBI), the market regulator, has already
indicated its willingness to introduce
more currency derivatives to give a
wider choice to investors. “We will look
into other kinds of derivatives (in currency
trading), options to begin with, in order to
offer increased products,” SEBI chairman CB Bhave recently told a Confederation of
Indian Industry (CII) seminar in Singapore.
Interestingly, the SEBI had launched
currency derivatives in August 2008, a
month before the global crisis wrecked
financial markets across the world. Within
its first year of operation, the daily
turnover of exchange traded currency
derivatives has already reached around Rs
30,000 crore. The figure, many argue,
could actually double by the end of the
And the markets are growing fast.
Consider the case of the Stock Services
Limited of Vadodara Stock Exchange (VSESSL)
— a part of BSE, NSE and MCX-SX — that
will launch currency derivatives once its
members clear the required examination
to be conducted by the National Institute
of Securities Markets (NISM).
“The currency derivatives is not for
retail investors — only for importers,
exporters, banks and others who can
benefit through hedging operations,” VSESSL
Managing Director Deepak Raval
recently told reporters in Vadodara.
And the growth is here to stay.