In a tightly controlled derivatives market like India’s, regulatory permission to launch a new product is like the starting gun in a race. As Benjamin Beasley-Murray reports, the hardest battle now is over FX derivatives.
The starting gun has been fired, and several exchanges
are off, hurrying to attract liquidity before their rivals
conquer the field. Each exchange believes it has a fighting
chance – but is there room for more than one?
Currency derivatives markets are rapidly becoming fertile
ground for exchanges in India, as regulators open up the
instruments that can be traded.
But as a fierce three-way battle breaks out between the
National Stock Exchange, the MCX Stock Exchange and United
Stock Exchange, observers reckon that the soil will surely soon
be drenched in the blood of two of these combatants.
On April 8, the Competition Commission of India ordered an
investigation into allegations by MCX-SX that the NSE had been
guilty of predatory pricing. MCX-SX argued that it was a misuse
of NSE’s dominant position that the latter waived
fees on currency derivatives, a practice that MCX-SX said it
could not afford to emulate.
MCX-SX said NSE’s pricing was designed to drive
the weaker MCX-SX out of business. NSE is denying the
accusation, stating to the CCI that "the fee waiver in the new
currency derivative segment … is in the nature of
introductory pricing with no intention to eliminate
Space for all
The NSE declined to discuss the matter with FOW. But a
supporter who is close to the exchange’s thinking
said there was no reason several exchanges should not coexist
in offering currency derivatives. He pointed to there being
more than a score of stock exchanges in India and said "there
is scope for all" in currency derivatives.
A source at MCX-SX offered a similarly happy view. The USE
— which at the end of last month got the official
go-ahead from the Securities and Exchange Board of India for
currency futures trading — refused to answer whether
it was sustainable that three exchanges could share the
business, rather than one of the trio winning out by achieving
significantly greater liquidity.
USE has a strategic partner in the Bombay Stock Exchange, which
has moved out of the way for it by delisting its own, somewhat
inactive, FX derivative offerings.
Observers, however, believe that "scope for all" cannot hold
true in the burgeoning currency derivatives market, and that
the exchanges are sugarcoating harsh realities.
Jamal Mecklai of Mecklai Financial, an Indian consulting
company that specialises in treasury risk management, said
(before USE officially joined the battlefield): "There will be
one winner and one also-ran."
Currency derivatives were launched in India in August 2008. At
first only the dollar/rupee pair was permitted, but at the
start of this February came rupee pairs with the euro, yen and
So far, only domestic firms are allowed to participate in the
While MCX-SX and NSE were more or less at level pegging on
volumes until the beginning of this year, in the first quarter
of 2010 MCX-SX has taken the lead. In the rupee-dollar pair,
the edge is only slight. MCX-SX had about $62bn of trading in
March, while NSE had $58bn.
But in the other currencies, MCX-SX had roughly €5.6bn of
trades to NSE’s €2.8bn, £3.5bn to
NSE’s £125m, and ¥114bn to
The non-dollar volumes are still small, but considering that
March was only their second month of trading, they are
Nearly 42,000 non-dollar contracts were traded daily on NSE and
MCX-SX in February, against 265,000 for the dollar/rupee.
For each of the two established players, daily FX turnover is
about $3bn a day.
And the spoils at stake are increasing.
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