Exchanges' poor communication and not RBI's circular causing losses in currency-derivatives, say sources

 Exchanges' poor communication and not RBI's circular causing losses in currency-derivatives, say sources : 

Leading exchange issued circulars in this regard to brokerages only on April 1, which was just few days before the earlier deadline.

Traders and brokers told Moneycontrol that they were told to expect a rollback from the regulators.

Retail traders have been hastily exiting their currency-derivative positions, incurring significant losses, after brokers alerted them to an impending RBI circular just days before its implementation deadline. However, experts said that the requirement outlined in the circular is not new and has been in place since at least 2020.

The recent circular merely underscored this requirement and mandated exchanges to inform traders accordingly, they said.

The Reserve Bank of India (RBI) had sent out a circular on January 5, asking stock exchanges to inform users that they must be able to establish (if required) that they have an underlying exposure to a currency—for example as an importer or exporter—before they can trade in the currency's derivative. The circular's directive was to come into effect from April 5.

In a circular issued on April 4, the central bank said that they have extended the deadline to May 3.

The January circular was followed by an uproar from various quarters claiming that the central bank has effectively killed the currency derivatives market. But legal experts and market insiders told Moneycontrol that the central bank's position on this derivative segment has not changed significantly for years, atleast when it comes to retail traders.

In the April 4 circular, the RBI stated, "it is emphasised that the regulatory framework for ETCDs has remained consistent over the years and that there is no change in the RBI’s policy approach."

The experts and insiders explained that the only additional directive in the January circular, which could impact retail traders, was that exchanges were asked to inform traders of an existing regulatory requirement.

This is where a large lapse seems to have occurred, which led to traders having to exit their positions at whatever price. Leading exchange issued circulars in this regard to brokerages only on April 1, which was just few days before the earlier deadline of April 5.

'No clarity given'

Market insiders, including traders and dealers, told Moneycontrol that there was no clear communication from the exchanges or the brokerages on this matter till few days before the deadline.

A currency dealer, who spoke on condition of anonymity to Moneycontrol, said, "We have been asking for clarity on RBI's circular since January 15 but no one from the exchanges or the brokerages told us anything definitively. They kept telling us that the regulatory requirement could be reversed or the deadline (April 5) might be extended."

The dealer said that they have been squaring off positions of their clients for the past two days.

The option premiums have been shooting up, with some option premiums even going up by 100x in a few minutes, but the dealer said that the traders have no choice but to exit at whatever price they can find.

Another trader said that some of the brokerages hinted that this directive may come into force but then assured that there will be a roll back done by RBI or by the market regulator. A broker, on condition of anonymity, seconded this. The roll back was never made. The central bank only gave an extension of the deadline, which is now May 3.

Not a new regulatory requirement

The regulatory requirement, that users have to establish contracted or anticipated currency-risk exposure, is not new. It was there even from 2020, said legal experts.

The dealer said that they have been squaring off positions of their clients for the past two days.

The option premiums have been shooting up, with some option premiums even going up by 100x in a few minutes, but the dealer said that the traders have no choice but to exit at whatever price they can find.

Another trader said that some of the brokerages hinted that this directive may come into force but then assured that there will be a roll back done by RBI or by the market regulator. A broker, on condition of anonymity, seconded this. The roll back was never made. The central bank only gave an extension of the deadline, which is now May 3.

Not a new regulatory requirement

The regulatory requirement, that users have to establish contracted or anticipated currency-risk exposure, is not new. It was there even from 2020, said legal experts.