## History 1. It is also called ETCD (exchange traded currency futures). 2. Currency Futures means a standardised foreign exchange derivative contract traded on a recognized stock exchange to buy or sell one currency against another on a specified future date, at a price specified on the date of contract, but does not include a forward contract. 3. They have INR as one of the currency in the pair (non-cross currency pair) or both foreign pairs (cross-currency pairs) 4. Other ETCD instruments are: 1. Currency Options (both Non-Cross Currency pairs and Cross Currency pairs) 2. Calendar spreads (based on currency futures) 5. Over-the-counter (OTC) currency derivatives products are: 1. Currency Forwards 2. Currency Swaps 3. Forex swaps 4. Currency Options 6. In recognition of the perceived need for currency futures to enhance the menu of tools available for hedging currency exposure and considering the recommendations of the Committee on FCAC, Reserve Bank of India in the Annual Policy Statement (April 24, 2007) for the Year 2007-08 proposed to set up a Working Group on Currency Futures to study the international experience and suggest a suitable framework to operationalise the proposal, in line with the current legal and regulatory framework. 7. Feb 28, 2008 - it was also decided in a joint meeting of RBI and SEBI that an RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives would be constituted, to prepare the regulatory framework. 8. [April, 2008](RBI_Group-Committee_20080428_Report%20of%20the%20Internal%20Working%20Group%20on%20Currency%20Futures.pdf) - RBI's Internal Working Group on Currency Futures submitted its report. 9. May 29, 2008 - The [RBI-SEBI Report](RBI_Group-Commitee_20080529_RBI-SEBI%20Standing%20Technical%20Committee%20On%20Exchange%20Traded%20Currency%20Futures.pdf) - on exchange traded currency futures was submitted. 10. [Aug 6, 2008](RBI_Notification_20080806_Guidelines%20on%20trading%20of%20Currency%20Futures%20in%20Recognised%20Stock%20New%20Exchanges.pdf) - RBI issued guidelines for AD Cat-I banks, on trading of Currency Futures in Recognised Stock / New Exchanges 1. Currency Futures (Reserve Bank) Directions, 2008 *(withdrawn)* was issued 11. [Aug 6, 2008](RBI_Notification_20080806_Introduction%20of%20Currency%20Futures_Permitting%20banks%20to%20become%20trading%20clearing%20members%20SEBI-approved%20exchanges.pdf) - Banks were permitted to become trading/ clearing members of SEBI approved exchanges 1. [Reserve Bank of India (Commercial Banks – Undertaking of Financial Services) Directions, 2025](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=13162), dated November 28, 2025 2. [Reserve Bank of India (Financial Services provided by Banks) Directions, 2016](RBI_Master%20Direction_20160526_Master%20Direction-%20Reserve%20Bank%20of%20India%20(Financial%20Services%20provided%20by%20Banks)%20Directions,%202016_Updated%20as%20on%20August%2010,%202021.pdf) *(withdrawn)*, dated May 26, 2016 12. [August 29, 2008](https://www.nseindia.com/static/products-services/about-currency-derivatives#:~:text=The%20exchange%20launched%20its%20currency,sterling%20and%20the%20Japanese%20yen.) - Currency futures started in India with the National Stock Exchange (NSE) launching the first currency futures contracts. 13. [July 30, 2010](RBI_Notification-20100730_%20Guidelines%20on%20trading%20of%20Currency%20Options%20on%20Recognised%20Stock%20New%20Exchanges.pdf) - RBI issued guidelines for AD Cat-I banks on trading of Currency Options on Recognised Stock / New Exchanges 14. [October 29, 2010](https://www.nseindia.com/static/products-services/about-currency-derivatives#:~:text=Currency%20Options%20was%20introduced%20on%20October%2029%2C%202010.) - European-style currency options (USD-INR) were introduced for the first time on NSE and USE in October 2010. 15. [September 29th, 2015](https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=35087#p38) - RBI announced the introduction of cross-currency futures and exchange traded option contracts in the Fourth Bi-monthly Monetary Policy Statement 2015-16. 1. As of now, on NSE, EURUSD, GBPUSD, USDJPY are traded. These *Big Four (Major Reserves)* also comprise the vast majority of global foreign exchange reserves 16. [June 20, 2014](RBI_Notification_20140620_Risk%20Management%20and%20Inter-bank%20Dealings-%20Guidelines%20relating%20to%20participation%20of%20Foreign%20Portfolio%20Investors%20(FPIs)%20in%20the%20Exchange%20Traded%20Currency%20Derivatives%20(ETCD)%20market.pdf) - RBI allowed foreign portfolio Investors (FPIs) to to enter into currency futures or exchange traded currency options. 1. Until this, only persons resident in India were allowed to participate in the currency futures and exchange traded currency options 17. [Dec 10, 2015](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=35689) - RBI [introduces](https://rbi.org.in/scripts/NotificationUser.aspx?Id=10172&Mode=0) cross currency futures and exchange-traded cross currency option contracts 18. [Feb 2, 2017](RBI_Notification_20170202_Risk%20Management%20and%20Inter-bank%20Dealings-%20Permitting%20Non%20Resident%20Indians%20(NRIs)%20access%20to%20Exchange%20Traded%20Currency%20Derivatives%20(ETCD)%20market.pdf) - NRIs were allowed to participate in ETCD. 19. Feb 27, 2018 - Options trading on EURINR, GBPINR and JPYINR was introduced on NSE along with cross-currency futures and options contracts on 3 pairs, viz., EUR-USD. GBP-USD and USD-JPY. 1. This [page](https://www.nseindia.com/products-services/currency-derivatives-contract-specification-inr) on NSE's website has contract specifications - Futures & Options on INR pairs -on NSE. 2. Around 60% of trades take place on NSE. Proprietary trades by banks and non-Banks, clients, and FPIs make up most of the trades on exchanges.  20. [Feb 2, 2017](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10849&Mode=0) - It was decided to allow NRIs to access the exchange traded currency derivatives market to hedge the currency risk arising out of their investments in India under FEMA, 1999. 21. [January 20, 2020](RBI_Notification_20200120_Introduction%20of%20Rupee%20derivatives%20at%20International%20Financial%20Services%20Centres%20(IFSC)%20copy.pdf) - RBI allowed ETCD, to be settled in foreign currency, traded in exchanges in IFSC. 1. May 8, 2020 - the two IFSC Exchanges, India International Exchange Limited (India INX) and NSE IFSC Limited (NSE IFSC), launched INR derivative (USDINR currency futures and options) contracts, settled in USD. ## Position limits 1. [[Measures to stabilise the exchange market#^b14c19|2012]] - Positions taken by banks in currency futures/options cannot be offset by undertaking positions in OTC market 1. While proof of an underlying exposure is an essential requirement in the OTC derivatives (some limit was allowed based on self declaration and no documents were required), no such requirement was in place for the exchange traded derivatives segment. 2. So this had created two different markets for the same underlying currency pair namely USD-INR. On account of having a sub-set of participants common to both the markets, the volatility of one market gets imposed on the other. To deal with this, even if partially, position limits of banks were revised on exposures to exchange traded products [^2]. 2. Higher currency futures volume prevailed in view of cash settlement, no requirement of underlying exposure and absence of any restriction on cancellation and re-booking. 3. [June 20, 2014](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8951&Mode=0) - The limits in ECTD was increased to $10 million. 1. Up to $10 million, no documentary proof of the existence of any underlying exposure was required, but underlying exposure was required. 2. Above $10 million, proof was required. 3. ==The rules regarding underlying exposure were harmonized. With this, the submission of proof of exposure was required for both OTC and ETCD (only above $10 million).== 4. Mar 31, 2015 - The trading limit was increased to $15 million (for [residents](RBI_Notification_20150331_Risk%20Management%20and%20Inter-bank%20Dealings%20-%20Revised%20Guidelines%20relating%20to%20participation%20of%20Residents%20in%20the%20Exchange%20Traded%20Currency%20Derivatives%20(ETCD)%20market.pdf) and [FPIs](RBI_Notification_20150331_Risk%20Management%20and%20Inter-bank%20Dealings-%20Revised%20Position%20Limits%20for%20Foreign%20Portfolio%20Investors%20(FPIs)%20in%20the%20Exchange%20Traded%20Currency%20Derivatives%20(ETCD)%20market.pdf)) from $10 million. 5. Aug 2016 - The **scheme of simplified hedging facility** was first announced by the RBI 1. [April 12, 2017](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40139) - draft scheme was release 2. [Nov 09, 2017](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11162&Mode=0) - For other than individuals *(resident and non-resident entities)*, It was was further increased to $30 million as part of the the scheme of simplified hedging facility 6. [Feb 26, 2018](RBI_Notification_20180226_Risk%20Management%20and%20Inter-bank%20Dealings-%20Revised%20guidelines%20relating%20to%20participation%20of%20a%20person%20resident%20in%20India%20and%20Foreign%20Portfolio%20Investor%20(FPI)%20in%20the%20Exchange%20Traded%20Currency%20Derivatives%20(ETCD)%20Market.pdf) - The trading limit in ETCD across all pairs and exchanges, for residents and FPIs, without a documentary proof of underlying exposure was increased from volume of $15 million to $100 million. 7. [Feb 15, 2019](RBI_Press%20Release_20190215_RBI%20announces%20draft%20directions%20on%20facilities%20for%20hedging%20foreign%20exchange%20risk%20by%20Residents%20and%20Non-residents%20(Amended).pdf) - [Draft directions](https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3641) on facilities for hedging foreign exchange risk by Residents and Non-residents (Amended) was issued 8. [Dec 05, 2019](RBI_MPS_SDRP_20191205.pdf) - Draft directions were modified based on the feedback and the recommendations of the [Task Force on Offshore Rupee markets](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47839) (Chairperson: Smt. Usha Thorat) 1. Users may undertake over the counter (OTC) currency derivative transactions up to USD 10 million (compared to USD 1 million in draft directions), without the need to evidence underlying exposure. 9. [Feb 18, 2020](RBI_Regulations_20200218_Foreign%20Exchange%20Management%20(Foreign%20exchange%20derivative%20contracts)%20Regulations,%202000_Includes%20amendments%20up%20to%2018th%20February%202020.pdf) - FEM (Foreign exchange derivative contracts) Regulations, 2000 was amended 10. [April 7, 2020](https://rbi.org.in/scripts/NotificationUser.aspx?Id=11861) - the regulatory framework governing the hedging of foreign exchange risks was revised 1. For derivative contracts involving INR, Authorised Dealers shall allow a user to book derivative contracts up to USD 10 million equivalent of notional value (outstanding at any point in time) without the need to establish the existence of underlying exposure, based on the feedback and the recommendations of the [Task Force on Offshore Rupee markets](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47839) (Chairperson: Smt. Usha Thorat) 11. [Dec 8, 2023](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=56889) - RBI announced that revisions in the regulatory framework for hedging of foreign exchange risks would be issued soon. 12. [Jan 5, 2024](RBI_Notification_20240105_Risk%20Management%20and%20Inter-Bank%20Dealings%20–%20Hedging%20of%20foreign%20exchange%20risk.pdf) - the framework on forex risk management was revised significantly 1. Part A (Section I) of the [Master Direction – Risk Management and Interbank Dealings dated July 5, 2016](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485) was revised. 2. OTC - RBI allowed users to take position in the OTC segment up to USD 100 million, across all ADs, for hedging contracted exposure without the requirement to provide documentary proof of the existence of underlying exposure, but with a requirement of an underlying exposure. 3. ==With this, the submission of proof of the underlying exposure was not required for up to USD 100 million equivalent (as contracts could be entered into based on self declaration of existence of genuine exposure) for both OTC and ETCD, but underlying exposure was required.== 4. But, in the ETCD part, RBI specifically mentioned that the recognized stock exchanges have to inform the users that while they are not required to establish the existence of underlying exposure, they must ensure the existence of a valid underlying contracted exposure which has been not hedged using any other derivative contract and should be in a position to establish the same, if required. 5. This created confusion that this a new guideline by RBI. 6. ==But RBI, on April 4, 2024 issued clarifications saying that there is no change in approach.== 7. [RBI_Group-Committee_20080428_Report of the Internal Working Group on Currency Futures](RBI_Group-Committee_20080428_Report%20of%20the%20Internal%20Working%20Group%20on%20Currency%20Futures.pdf) 8. To recall, ==[Report of the Internal Working Group on Currency Futures, Nov 2007](RBI_Group-Committee_20080428_Report%20of%20the%20Internal%20Working%20Group%20on%20Currency%20Futures.pdf#page=44&selection=43,0,44,84)==, the group had agreed that the requirement of an underlying exposure to trade in OTC foreign exchange market is very difficult to implement in an exchange- traded regime. 13. [Apr 04, 2024](RBI_Press%20Release_20240404_Exchange%20Traded%20Currency%20Derivatives.pdf) - RBI clarified that there was never an exemption for the need of an underlying exposure in ETCD, and the FEM (Foreign exchange derivative contracts) Regulations, 2000 (amended up to Feb, 2020) clearly states that a person may enter into an ETCD contract involving the INR only for the purpose of hedging a contracted exposure. ## Products 1. Currency Futures and Currency Options are the most popular ones. 2. Rollover futures/Calendar Spreads 1. They are based on currency futures 2. difference between two futures , say $F_1$ and $F_2$, and is used to hedge the difference between squaring off the present month futures ($F_1$)and taking position in further month futures ($F_2$) 3. An importer would buy the basis (so they will pay difference equal to sell current month futures and buy further month futures) lock the difference between two futures price. So total cost = +.........(-$F_3$+$F_2$)-$F_1$ where (-$F_3$+$F_2$) is locked. Here (-) is outgo of funds, and (+) is receipt of funds. 3. Exposure - No documentary proof is required up to $100 million (which is the also the maximum position limit across all the exchanges), but there should be underlying exposure. 4. 11 serial weekly cycle (excluding expiry week wherein monthly contracts expires on a Friday) 1. All weekly expiration contracts will expire on Friday of the expiring week 5. 12 month trading cycle 1. They expire 2 working days prior to the last business day of the expiry month at 12:30 pm and trade modification end time will be till 01:00 PM. 2. Example - For June 2026, last business day is 30th June, and 2 working days are 30th, 29th June, and (28, 27 and 26 are holidays) so the expiry is on 25-June-2026. For May-2026, expiry is on 25-May-2026. 3. If the pre-scheduled expiry date happens to be a market holiday, the NSE will move the expiry date to an earlier working day and send out a notice to inform traders of the new date. 6. 1 lot is 1000 units of the foreign currency (except JPY), so 1 lot of USDINR is 1000 USD, and 1 lot of JPYINR is 1,00,000 JAPANESE YEN (but price is also for 100 Yen) 7. Initial Margin is based on SPAN Margin. 8. Mark-to-Market (daily settlement) settlement is T+1. So as it is not possible to collect mark-to-market settlement before the start of the next trading day, initial margin is a higher amount. 9. DSP (Daily settlement price) is calculated on the basis of the last half an hour weighted average price, or the last traded price, or the latest available closing price. 10. Position Limits 1. [NSE](https://www.nseclearing.in/risk-management/currency-derivatives/position-limits) - A client's (individual) total open contracts (open lots) cannot exceed 6% of the entire market's open contracts (total open interest) or $20 million, whichever is higher, and 2. $100 million across exchanges 11. Final settlement is T+2, and based on [exchange rate published by FBIL](WSS%20-%20Ratio%20and%20Rates.md#FBIL%20-%20Reference%20Rate%20&%20Forward%20Premia) on the last trading day. 12. ==NSE - [Circulars](https://www.nseindia.com/resources/exchange-communication-circulars#) titled Currency Derivatives Consolidated Circular.== 13. [NSE](https://www.nseindia.com/static/products-services/currency-derivatives-contract-specification-inr) - Contract Specifications (INR as one of the currency) 14. [NSE](https://www.nseindia.com/static/products-services/currency-derivatives-contact-specification-cross-currency) - Contract Specifications (both foreign currencies, also called cross-currency pairs) ## Cost of trading 1. Link to [Calculator](https://docs.google.com/spreadsheets/d/11THiwL-KXnSNQC7T1lNAjLLvV30HVII47EMPf1__Ir0/edit?usp=sharing) ## Related Notes 1. [Framework for Hedging FX risk](Foreign%20Investment%20in%20India%20(Various%20Routes).md#Framework%20for%20Hedging%20FX%20risk) 2. [Forex Markets](Forex%20Markets.md) ## Regulatory Framework (SEBI, RBI and Exchanges) SEBI and the RBI jointly regulate currency futures in India 1. SEBI - As it is an exchange traded derivative, it is [regulated](https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListingAll=yes&search=Currency%20Derivatives) by the Securities and Exchange Board of _India_ (_SEBI_). 2. FEM (Foreign Exchange Derivative Contracts) Regulations, 2000 [dated May 3, 2000](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12100&Mode=0) and subsequent amendments thereto. 3. RBI - [Master Direction – Risk Management and Inter-Bank Dealings](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485). 1. ==[Directions](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485#:~:text=Directions%20for%20exchange%20traded%20currency%20derivatives) for exchange traded currency derivatives== 2. Directions in respect of all types of foreign exchange transactions (including cash, tom and spot) 3. NOTE - *(subsumed)* Currency Futures (Reserve Bank) Directions, [2008](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=4410&Mode=0#fed1), as [amended](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485#:~:text=List%20of%20notifications%20superseded) from time to time, and Exchange Traded Currency Options (Reserve Bank) Directions, [2010](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=5913&Mode=0)), July 30, 2010, as amended from time to time (both have been incorporated in this Master Direction on [Jan 5, 2024](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12594)) 4. ==NSE - [Circulars](https://www.nseindia.com/resources/exchange-communication-circulars#) titled *Currency Derivatives Consolidated Circular.*== 5. [NSE Clearing Limited](https://www.nseclearing.in/risk-management/currency-derivatives/position-limits) - Risk Management for Currency Derivatives 1. It is also known by name National Clearing, and formerly known as National Securities Clearing Corporation Limited (NSCCL). 6. [NSE](https://www.nseindia.com/static/products-services/currency-derivatives-contract-specification-inr) - Contract Specifications (INR as one of the currency) 7. [NSE](https://www.nseindia.com/static/products-services/currency-derivatives-contact-specification-cross-currency) - Contract Specifications (both foreign currencies, also called cross-currency pairs) 8. For the purpose of exchange traded currency derivatives, Recognised Stock Exchanges and Recognised Clearing Corporations are authorised under Section 10 (1) of the FEMA, 1999. ## References 1. RBI. (2005). *Report of the Internal Technical Group on Forex Markets*. [pdf](RBI_Group-Committee_20050624_Report%20of%20the%20Internal%20Technical%20Group%20on%20Forex%20Markets.pdf) 2. RBI. (2006, July 31). *Report of the Committee on Fuller Capital Account Convertibility (Tarapore Committee-2)*. [pdf](RBI_Group-Committee_2006_Committee%20on%20Fuller%20Capital%20Account%20Convertibility_2006_Chairman-S.S.Tarapore_Tarapore%20Committee-2.pdf) 3. ==RBI. (2008, April 28). *Report of Internal Working Group on Currency Futures*. [Link](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=532) | [pdf==](RBI_Group-Committee_20080428_Report%20of%20the%20Internal%20Working%20Group%20on%20Currency%20Futures.pdf) 4. SEBI. (2008, May 29). *==The RBI-SEBI Standing Technical Committee On Exchange Traded Currency Futures==*. [pdf](RBI_Group-Commitee_20080529_RBI-SEBI%20Standing%20Technical%20Committee%20On%20Exchange%20Traded%20Currency%20Futures.pdf) 5. G. Padmanabhan. (2011, Sept. 13). *Forex Market Development – Issues and Challenges – Thoughts of a Returning Forex Market Regulator.* \[Speech\]. RBI Bulletin. [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=12508#F0) | [[RBI_Speech_20110913_Forex Market Development – Issues and Challenges – Thoughts of a Returning Forex Market Regulator_G. Padmanabhan.pdf|pdf]] 6. RBI. (2011, April 01). *An Empirical Analysis of The Relationship Between Currency Futures And Exchange Rates Volatility In India*. RBI WPS [(DEPR)](https://www.rbi.org.in/commonman/english/Scripts/Departments.aspx#DEPR1): 01/2011. [Link](https://rbi.org.in/scripts/PublicationsView.aspx?Id=13323) | [[RBI_Research_WPS_20110401_An Empirical Analysis of The Relationship Between Currency Futures And Exchange Rates Volatility In India.pdf|pdf]] 7. G. Padmanabhan (ex-Executive Director, RBI). (Aug 10, 2012). *Managing Currency Risk in the New Normal.* \[Speech\]. Iforex Leaders Summit, Mumbai on July 28, 2012. RBI [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=13477) | [[RBI_Speech_20120810_Managing Currency Risk in the New Normal_G. Padmanabhan.pdf|pdf]]. 8. RBI. (July 10, 2019). [*Report](Report%20of%20the%20Internal%20Working%20Group%20on%20Comprehensive%20Review%20of%20Market%20Timings%202019.md) of the internal working group set up for a comprehensive review of market timings*. [pdf](RBI_Group-Committee_20190710_Report%20of%20the%20Internal%20Working%20Group%20on%20Comprehensive%20Review%20of%20Market%20Timings.pdf) 9. ==RBI. *Master Direction - Risk Management and Inter-Bank Dealings*. [Link](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485#C2)== [^2]: G. Padmanabhan (ex-Executive Director, RBI). (2012, July 30). *Managing Currency Risk in the New Normal.* \[Speech\]. Iforex Leaders Summit, Mumbai on July 28, 2012. RBI [Link](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=13477) | [[RBI_Speech_20120810_Managing Currency Risk in the New Normal_G. Padmanabhan.pdf|pdf]].