Forex derivatives diktat to hit brokerages’ revenues – Market News

Several brokerages are set to see their revenues from currency derivatives trading taking a hit after the recent diktat from the Reserve Bank of India (RBI). The central bank has made it mandatory for forex traders to have underlying exposure on their derivatives contracts from May 3.

In fact, brokerages are contemplating downsizing their teams in the currency derivatives desk as trading volumes have declined significantly.

“The current team in the currency derivatives desk was deployed keeping speculators and hedgers in mind. Around 85% of the volume in the currency derivatives is generated by non-hedgers, which include speculators, arbitragers and proprietary traders,” head of the currency desk of a large brokerage firm told FE. “Exit of non-hedgers means a sharp fall in trading volumes, which in turn means downsizing of the currency derivative desk,” he added.

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With trading volumes drying up, brokerages will shift the workforce from their currency derivatives desk to other verticals, he added.

The central bank’s move is aimed to ensure that the exchange-traded currency derivatives can only be used for hedging purposes.

“The contribution of our currency derivatives in total trading revenue has been in ‘double digits’ over past several quarters. As trading volumes have come down sharply after RBI’s directive, we are expecting around 80% decline in revenue from currency derivatives trading in the current quarter,” said a senior official of a brokerage firm. “As trading has started declining, now there are discussions over whether we should retain the currency derivatives desk or not,” he added.

As per industry estimates, around 5% of volumes are by corporates who are proper hedgers and around 7-8% volumes come from foreign portfolio investors (FPIs) who are hedging their exposures, while around 85% volume is generated by non-hedgers, including speculators, arbitragers and proprietary traders.

Open interest in currency derivatives contracts on the exchanges fell around 50% over the past two weeks as most participants avoided taking fresh positions and continued to unwind their existing contracts. Open interest contracts fell to 3.3 million on April 8, from 6.3 million on March 27, according to the NSE data. Open interest refers to the total number of outstanding derivatives contracts of options or futures that have not been settled.