NRI Trading in Currency Derivatives

Published on Sunday, June 7, 2020 by Chittorgarh.com Team | Modified on Thursday, May 13, 2021

Contents:

1. NRI Investment in Currency Derivatives
   • Terms and Conditions
   • Permitted Currency Pairs
2. The Requirement for NRI trading in Currency Derivatives
3. What are Currency Derivatives?
4. Benefits of investing in Currency Derivatives
5. Conclusion
6. FAQs

NRI Investment in Currency Derivatives

NRIs can trade in Currency Derivatives at NSE and BSE stock exchanges. NRIs have been granted access to Exchange-Traded Currency Derivatives (ETCD) by RBI in Feb 2017.

NRIs earn in foreign currency and they are prone to currency risk all the time. Hence traditionally they were already permitted to hedge their Rupee currency risk over the counter (OTC) with authorized dealer Category 1 banks (AD). This helps them to protect from currency risk to a certain extent. With the intent to extend some more benefits to NRI, RBI decided to grant NRIs an entry to the ETCD and allowing them access to additional hedging products on certain terms and conditions.

• Authorized Dealer Category 1 Banks (AD Banks)are the banks authorized by RBI to deal in foreign exchange. Check the list of AD Banks in India.

Terms and conditions for NRI investment in Currency Derivatives

NRI trading in ETCD has to be routed through an Authorised Dealer bank only. Thus, an NRI will need to designate an Authorized Dealer Category 1 Bank (AD) who should also be a clearing member of the stock exchange or clearing corporation.

NRI can hedge the currency risk arising out of their permissible rupee investments in debt and equity and dividend due and balances held in NRE accounts by taking positions in currency futures and options.

The exchange will provide the details of all transactions done by NRI to the designated AD bank.

The designated AD bank will be responsible to monitor and report the combined positions of NRI in OTC and ETCD segment done with them or any other AD bank. In case of any issues noted, the designated AD bank will report the breaches to RBI/SEBI.

The ultimate responsibility of the exposure taken lies with the NRI. NRI cannot hedge in case they do not have any existing position in that currency. In case NRIs are found hedging without existing positions, they would be liable to face any action as deemed right by RBI.

Permitted currency pairs for NRI trading and their position limits

NRIs are permitted to trade in 4 currency pairs as per the SEBI Circular. Listed below are the pairs with their position limits. The combined NRI investment should not exceed the below limits:

• Open interest (OI) is the number of open outstanding contracts across all market participants. The data for OI is made available at the end of each day on the NSE site.

The Requirement for NRI trading in Currency derivatives

To trade in currency derivatives, an NRI is required to fulfill the below conditions:

NRI needs to designate an Authorised Dealer Category-I bank who is a clearing member of the exchange or the clearing corporation. You can check with your bank with whom you have the NRI account if they are offering these services.

NRI is required to apply for the Custodial Participant (CP) code through the clearing member i.e. in this case through the designated AD Cat I bank. To apply for CP code, an NRI is required to provide the copy and details of the PAN, passport no. with its expiry date. The AD bank updates their details and sends it to the clearing corporation for CP code allotment.

NRI needs to place margin with exchange via the clearing member for trading in currency derivative

Note: The CP code allotted to an NRI should be used only for Currency Derivatives trading.

What are Currency Derivatives?

Currency derivative trading is an exchange of two currencies at an agreed price at a future date. The exchange of currency can be done by dealing in currency futures or currency options.

The functioning of currency derivative trading is pretty similar to equity derivative trading with 2 main differences.

1. In equity derivative, the underlying asset is the stock and in currency derivatives, it is the currency
2. A stock broker is not involved in NRI currency trading as it is currently allowed to be facilitated only by AD Category 1 banks.

Benefits of investing in Currency Derivatives

An NRI frequently transfers money from abroad to India for investment purposes or to send money to their family. They also take money back to their country of residence as required. In this process, an NRI is inclined to currency risk due to frequent exchange rate fluctuations. Thus, by investing in currency derivatives an NRI can benefit themselves by hedging the currency risk. Apart from hedging of the currency risk, there are many other benefits which an NRI can avail by investing in exchange-traded currency derivatives as per below:

• It eliminates the counterparty risk which is more common in OTC markets.
• It provides a transparent trading platform.
• One can take higher leverage pay paying lesser margins.
• The investment portfolio gets diversified.

Conclusion

The move by RBI/SEBI to open the gates for NRIs to enter exchange-traded currency derivatives is a very good initiative to allow additional products for NRI to hedge their currency risk. However, this product is yet to pick up the required momentum as not many NRIs are aware of this. We have not seen much product marketing by the banks to offer these services to NRI which puts this investment option in ambiguity. An NRI wanting to trade in currency derivative can approach their bank to seek further guidance.