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Commentary

Rupee Futures: $25m is the MINIMUM, stupid!

From Mint: Forex futures position limits must be raised:

The key worry about the recommendations (now accepted as guidelines) is the low position limit prescribed for trading members. Trading members can have a maximum gross open position of not more than $25 million (Rs105 crore now). A trading member which is a bank can have an open position of up to $100 million.

The guidelines don’t mention it specifically, but it is safe to assume that a position limit of $5 million (or around Rs21 crore) is applicable at the client level, based on the recommendations of the standing technical committee. That would leave out meaningful participation from large and mid-sized companies which have a much bigger hedging requirement.

This is just wrong.

SEBI’s guidelines say:

The gross open position of a Trading Member, across all contracts, shall not
exceed 15% of the total open interest or 25 million USD, whichever is higher.
However, the gross open position of a Trading Member, which is a bank, across
all contracts, shall not exceed 15% of the total open interest or 100 million USD,
whichever is higher.

The phrase “whichever is higher” means each trading member can have a position upto 15% of the total open interest. If this 15% works out to less than $25m then the limit is $25m. If the total open interest is $1bn, then the position trading limit will be $150 million per trading member. (A trading member is typically a brokerage firm, you and I will be “clients” of members, who will have a smaller limit)

To give you a comparison: just the near month Nifty contract has an open interest of 15,000 cr. which is nearly $4bn. I assume that currency futures will have at least $1 billion of interest considering the number of players involved and the potential for hedging risk.

I don’t think member limits will be $25 million for too long, and I don’t think trading will be deterred this way. The Mint author should have done some more research before putting $25 million as a CAP rather than a FLOOR value. If you’re reading this and haven’t figured it out yet: Each trading member (non bank) can have an exposure of AT LEAST $25 million. Above that they are limited to 15% of open interest.

What is to stop corporates from opening accounts with different banks or brokerage houses and taking on more positions than individual members allow?

I’m excited about the trading of currency futures. I do not like the fact that there are no options, but even futures are worth having.