NSE, BSE Push RBI Circular: Restrictions on Currency Derivatives

The stock exchanges NSE and BSE have asked the brokers to follow the RBI notification of 5 January 2024 on hedging of foreign exchange risk, this restricts the use of ETCDs (Exchange Traded Currency Derivatives), the circular says no new positions would be allowed from 3 April 2024 but square-offs are allowed but from 5 April 2024, no activity would be allowed.

Square-Off for Brokers

Brokers are putting clients’ forex contract pairs involving the rupee on square-off mode starting from April 2, clients without underlying forex exposure can only square off their existing contracts. 

Clients with valid underlying exposure can continue to take incremental positions after April 5, whereas the clients without underlying exposure can only square off their existing positions. One of the major pairs with rupee are the USD-INR, Euro-INR, Yen-INR and GBP-INR. Here USD-INR contract makes up to 90% of the daily average turnover.

Ambiguous Brokers

Many of the brokers now are alert and are not clear about the circular’s use of the term “valid underlying contracted exposure” which has prompted them to stay in a square-off mode. Any failure to comply here would bring the brokers in direct violation of FEMA (Foreign Exchange Management Act) which the brokers are weary of.

Why this intervention?

The RBI has intervened significantly in the interbank market and the ETCD segment since September 2024. The goal has been to maintain the rupee exchange rate within a range of 82.5-83.5 with the USD.

NSE dominance in ETCD

NSE operates with ETCDs while commanding a 99% turnover, nearly the entire market, the average daily turnover on NSE currency derivatives was ₹1.46 trillion.

Conclusion: The RBI circular’s impact on currency derivatives trading remains a focal point for brokers and market participants. The main aim is to keep the rupee stable on a global scale, the market looks to adjust to the new guidelines, and brokers look to seek clarity from regulatory bodies.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.