After taking due cognizance of the forex market and international developments it appears that introduction of currency futures may be considered to provide the participants with an additional hedging tool. Initially, a standardized USD-INR contract is recommended, with Euro–INR contract after a period of six months. )
Contract design While attracting liquidity through product innovation is a feature of the competitive markets, in the initial phase, a standardized product across various exchanges (in terms of contract size, final settlement dates, settlement procedure of contracts, tenors of contracts, etc) would invite greater participation and add to the liquidity of futures markets. Size of the contract It is important that the contract size be kept at such a level that it facilitates price discovery as well as trading, particularly for retail segment of the market. Hence, a single contract of notional value USD 1,000 may be introduced.Tenors of contracts Initially, the tenors of the contract may largely replicate the tenors of the currency forwards and to this end, the currency futures maturing in the first 12 calendar months may be offered. Settlement of Contracts Given the complications that delivery based settlement entail, and the fact that Indian Rupee is not fully convertible on capital account, settlement only on cash basis, based on spot Reserve Bank reference rate on the expiry date may be permitted. Cash settlement would also ensure convergence between regulations in respect of OTC markets and currency futures market, since cancellation of a forward contract on the dateof maturity is akin to cash settlement.
Settlement Cycle The key issue was whether currency futures should have a maturity co-terminus with OTC forwards or not. Taking into account the market feedback and the expert views of the TAC, the maturity of the futures contract may be co-terminus with the settlement of the month end forward contracts.
BY VIVEK MITTAL
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