The New Market Jingle

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.

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.

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 two-year mark.

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.

WRITER’S EMAIL
shantanu@tehelka.com