NRI Trading in Currency Derivatives

Published on Sunday, June 7, 2020 by Chittorgarh.com Team

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NRI Trading in Currency Derivatives

Contents:

  1. NRI Investment in Currency Derivatives
  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:

NRI Permitted Currency Pairs for Currency Derivatives Trading

Currency Pair Position limits
USD-INR Gross open position across all contracts shall not exceed 6% of the total open interest or USD 10 million, whichever is higher
EUR-INR Gross open position across all contracts shall not exceed 6% of the total open interest or EUR 5 million, whichever is higher.
GBP-INR Gross open position across all contracts shall not exceed 6% of the total open interest or GBP 5 million, whichever is higher.
JPY-INR Gross open position across all contracts shall not exceed 6% of the total open interest or JPY 200 million, whichever is higher.
  • 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.

Basics of Currency Derivatives Market

Currency Pairs

USDINR

EURINR

GBPINR

JPYINR

Trading hours

Monday to Friday - 9:00 a.m. to 5:00 p.m.

Lot size

1,000

1,000

1,000

100,000

Contract trading cycle availability

At any time 12 month trading cycle contracts are available.

Last trading day

Two working days before the last business day of the expiry month at 12:30 PM

Final settlement day

Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.

Initial margin

SPAN Based Margin

Extreme loss margin

1% of MTM value of gross open position

0.3% of MTM value of gross open position

0.5% of MTM value of gross open position

0.7% of MTM value of gross open position

Settlement

Daily settlement: T + 1 Final settlement: T + 2

Mode of settlement

Cash settled in Indian Rupees

Daily settlement price (DSP)

Calculated based on the last half an hour weighted average price.

Final settlement price (FSP)

RBI reference rate

RBI reference rate

Exchange rate published by RBI in its Press Release captioned RBI reference Rate for US$ and Euro

Exchange rate published by RBI in its Press Release captioned RBI reference Rate for US$ and Euro


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.

 

ProStocks Non-PIS NRO Trading

 

Frequently Asked Questions

  1. 1. What is the AD Category 1 bank?

    Authorized dealer Category 1 Banks, popularly known as AD Cat I Banks, are the banks with an RBI license to buy and sell foreign exchange for specified purposes. Such banks aim to ease the foreign exchange facilities for NRI.

     

  2. 2. Can NRI designate any AD Cat 1 bank to trade in Currency Derivatives?

    An NRI wanting to trade in the exchange-traded currency derivatives needs to appoint an AD Category 1 Bank to monitor and report their position limits. The appoint AD Cat I bank should also be a clearing member of the exchange or clearing corporation.

     

  3. 3. Can NRI trade currency derivatives through a stock broker?

    An NRI can trade currency derivatives only by designating an authorized dealer Category 1 Bank to monitor and report their position limits. Currently, stock brokers are not allowed to offer NRI trading or clearing services as per RBI regulations.

     

  4. 4. Which are the allowed order types for an NRI?

    NRIs are permitted to do Equity Delivery, Equity F&O and Currency F&O trading in India. NRIs are not permitted to do intraday trading.

    An NRI can place a market order and limit order. The stop-loss order is mostly used for intraday trading. However, since NRIs are not allowed to do intraday trading in equity, this order type may not be offered to NRIs by all brokers. Some brokers may still allow NRI to place stop-loss orders in the F&O segment.

    Apart from the above common order types, the other advance order types that NRIs have access to are After Market Order (AMO) and Good Till Cancelled Order (GTC).

    The availability of advance order types like AMO and GTC depends on the broker to broker. Please check with your broker for available order types for NRI.

     

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