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Table of Contents Indian Foreign Exchange Markets INR trades in a managed floating exchange rate regime INR is fully convertible on India’s current account,

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Presentation on theme: "Table of Contents Indian Foreign Exchange Markets INR trades in a managed floating exchange rate regime INR is fully convertible on India’s current account,"— Presentation transcript:

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2 Table of Contents

3 Indian Foreign Exchange Markets INR trades in a managed floating exchange rate regime INR is fully convertible on India’s current account, but not on the capital account Foreign institutional investors can fully repatriate their investments Resident Indian individuals have been permitted to invest offshore All foreign currency spot and forward transactions need to be routed through schedule commercial banks (Authorized Dealers) Access is restricted to banks and entities having a commercial exposure Volumes and tenor is restricted to underlying exposure Only banks have open position limits

4 Indian Foreign Exchange Markets Daily average turnover of the Indian FX markets stands at USD 34 billion Flows driving the USDINR rate include; Trade and capital flows Hedging of these flows by corporate and institutional clients Remittances by non resident Indians Investments by offshore institutions in India Investment by Indian companies offshore Directional views of market participants India’s total imports: USD 250 billion, exports USD 160 billion (FY 2007-08) Capital flows, FIIs USD 31 billion, Foreign Direct Investment USD 15 billion, Bank Capital USD 11 billion

5 Indian Foreign Exchange Markets - Participants

6 Why do they participate in the FX market ? Directional Views Positioning for INR appreciation or depreciation Hedging existing exposure Importers & Exporters hedging future payables or receivables Borrowers hedging FCY loans – Interest or Principal payments NRIs looking to hedge their investment in India Resident Indians looking to hedge investments offshore FIIs hedging their investments in India Trade and Capital Flows Remittances for trade or services and capital transactions Arbitrage Entities who can access onshore and non deliverable forward markets

7 What factors affect trading decisions ? Macro economic views Monetary Policy RBI intervention Flow information Performance of other Asian currencies Performance of equity markets USD sentiment Performance of key commodities affecting trade Policy announcements affecting flows – trade or capital REER – Real Effective Exchange Rate Data announcements

8 Trading Strategies – Directional views 1991: BOP crisis 1998: Nuclear tests 2001: Nasdaq crash 2003: Strong FII flows 2004: BJP election loss 2006: Drop in RBI intervention 2008: Oil spikes

9 Trading Strategies – Directional views View: INR will depreciate against USD, caused by India’s sharply rising import bill and poor FII equity flows Trade: USDINR 31 July contract: 43.5000 Current Spot rate (9 July 08):43.0000 Buy 1 July contract:Value Rs. 43,500 (USD 1000 * 43.5000) Hold contract to expiry:RBI fixing rate on 29 July 08 – 44.0000 Economic return:Profit, Rupees 500 (44,000 – 43,500) A Currency Futures contract is exactly like a futures contract on the NIFTY or on INFOSYTCH. A futures price “F” is traded on screen. The price is the USDINR exchange rate at a future date.

10 Trading Strategies - Hedging IT exporter - contract earning USD 1 million per month for 12 months Risk to INR appreciation Trade - Sell 1000 contracts of each expiry out to 12 months On each expiry sell the USD remittance in the spot market and match the rate to the fixing rate on the futures contract Follow this principal if you continue to hold the same view through the life of the service contract

11 Trading Strategies - Hedging Individual investor invested USD 100,000 in equities offshore Purchased USD by paying INR 4,300,000 (Spot @ 43.0000) At the end of 12 months; offshore portfolio valuation is USD 110,000 and USDINR is trading at 40.0000 Net INR proceeds INR 4,400,000 USD return of 10%, your INR return is only 2.33% Alternate strategy: hedge the initial investment, by selling the 12 month futures contract at the time of trade inception

12 Trading Strategies - Arbitrage Arbitrage can potentially exist between, currency futures, OTC forwards and the non-deliverable forwards traded offshore An arbitrage can be executed by an entity having access to any two of the above Corporate entities with an underlying exposure, can straddle both markets Sell 1st month in currency futures Buy 1 month forward in OTC markets This scenario can exist when currency futures are trading higher than forwards which will also be governed by interest rate differentials and USD supply with banks Restricted access to the OTC and NDF markets could translate to the arbitrage gap not closing

13 OTC vs Futures OTC MarketExchange Traded Futures AccessibilityLowHigh Price Transparency LowHigh LiquiditySubject to credit limitsHigh AgreementsCustomizedStandard Credit Exposure YesMitigated through the clearing corporation SettlementPhysical DeliveryNet Settled in INR Underlying exposure RequiredNot required

14 OTC vs Futures Will it trade like OTC forwards INR not fully convertible Regulatory restrictions on borrowing in foreign currency Delivery vs net settlement Wider set of market participants RBI intervention The Non Deliverable Forwards market does not always track onshore OTC forwards, especially at the short end Sharp moves in spot Expectations of immediate INR appreciation / depreciation Flow information

15 What is in it for YOU ? A new asset class which was earlier not permitted for trading to all Indian residents Number of market participants will increase dramatically. More client business Permitting NRIs and FIIs at a future date could shift a substantial portion of the NDF business to the exchange Potential for arbitrage in the OTC vs Futures market could increase volumes in both markets

16 Trading Get Connected NEAT Plus NOW CTCL NOW websiteNEAT Plus

17 Contract specifications Market timings would be 09:00 to 17:00 Order driven market Contract fixing two days prior to Contract Expiration date, settlement on contract expiry date CategoryDescription UnderlyingRate of exchange between 1 USD and INR Contract Size USD 1000 Contract Months 12 near calendar months Expiration Date and Time Last business day of the month Min Price fluctuation 0.25 paise or INR 0.0025 SettlementCash settled in INR on relevant RBI reference rate

18 Risk Management Real time Upfront portfolio based margins Based on 99% VaR Client level monitoring Initial Margin Margins calculated using SPAN Minimum Initial margin 1.75% on day 1, 1% thereafter Calendar spread margins defined at Rs. 250/- Monitored at Trading and Clearing Member level

19 Risk Management Extreme Loss Margin 1% on value of gross open positions Monitored at Clearing Member level Positions Limits Client : 6% of total open interest or USD 5 million whichever is higher Trading member : 15% of total open interest or USD 25 million whichever is higher

20 Clearing & Settlement Daily Clearing and Settlement Trades processing Position computation Daily settlement price Mark to market settlement Client margin reporting Final Clearing and Settlement Expiry day processing Final settlement price Final settlement of futures contracts

21 Membership Separate membership for the Currency Derivatives Segment Balance sheet networth: Trading member Rs. 1 Crore; Clearing member Rs 10 crores Minimum Liquid Networth for clearing members Rs. 50 Lakhs Separate Certification required Members to be approved by SEBI Foreign Institutional Investors and Non Resident Indians not permitted to trade in the initial phase

22 Membership In Rupees LakhsTrading Member Trading and Clearing Member Interest free cash security deposit with NSEIL 10 Interest free cash security deposit with NSCCL NIL25 Collateral Security Deposit with NSCCL NIL25 For every trading member, clearing member needs to provide CashNIL5 Non - CashNIL5 Deposits for Existing Members :

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