A major reform in the financial markets is set to become reality. After the RBI-Sebi standing technical committee submitted its report, both regulators on Wednesday announced a detailed roadmap for introducing exchange-traded currency derivatives. It includes detailed criteria for stock exchanges as well as banks.

Sebi, in its circular, said a recognised stock exchange with nationwide terminals or a new exchange recognised by Sebi could set up a currency futures segment after obtaining regulatory approval. The application must be accompanied by details of the derivatives product proposed to be introduced.

Unveiling the banking side of the norms, RBI said authorised banks with a minimum net worth of Rs 500 crore, whose net NPAs are less than 3%, are permitted to become trading and clearing members of the currency futures market. These banks are also required to have a minimum capital adequacy of 10% and should have made a net profit over the last three years.

The features of standardised currency futures, according to RBI, will include only dollar-rupee contracts, the size of each to be $1,000, and will be quoted and settled in Indian rupees. Maturity of the contracts cannot exceed 12 months and the settlement price will be the central bank?s reference rate on the last trading day, RBI said. RBI has said only residents of India may purchase or sell currency futures.

Markets regulator Sebi, for its part, said a stock exchange would have to ensure that the design of a proposed currency derivative complied with the report of the standing technical committee, which submitted its report on May 29. ?The last day for trading of (a) contract shall be two working days prior to the final settlement day with the settlement price on the last trading day being the Reserve Bank?s reference rate on that date,? stated the Sebi circular.

Speaking to FE, Sebi chairman CB Bhave said: ?The product was available in the over-the-counter space, but with exchanges now able to launch it, there will be greater transparency and price visibility. Besides, smaller companies will also able to leverage it.?

Bhave had said on Tuesday that three entities had evinced interest in setting up a currency derivatives trading platform. Sources said these were the National Stock Exchange, the Bombay Stock Exchange and Financial Technologies.

Market players have welcomed the move. ?We believe a lot of activity will take place in this market. It would be a good hedging tool for Indian corporates. Banks and corporates definitely stand to benefit. We think, just like bonds and derivatives, the currency futures market will help further strengthen Indian financial markets.

There would now be further transparency,? noted NS Venkatesh, MD & CEO, IDBI Gilts.

The report of the technical committee had said that all surveillance and disclosure norms needed to be complied with. Membership to the currency futures market of a recognised stock exchange would be separate from membership to the equity derivative segment or the cash segment, RBI said. Membership for both trading and clearing on the currency futures market would be subject to Sebi guidelines, the central bank added.

Sebi said the gross open position of a trading member, across all contracts, could not exceed 15% of the total open interest, or $25 million, whichever is higher.

?However, the gross open position of a trading member, which is a bank, across all contracts, cannot exceed 15% of the total open interest, or $100 million, whichever is higher?, the regulator said. The position limits for various classes of participants in the currency futures market are subject to Sebi guidelines, RBI said.

RBI has instructed authorised dealers (category-I banks) to operate within prudential limits, such as net open position and aggregate gap limits.

The exposure of banks on their own account in the currency futures market will also form part of these limits. The trading of currency futures will be subject to initial, extreme loss and calendar spread margins, and clearing corporations or houses of exchanges should ensure such maintenance of such margins by participants on the basis of Sebi guidelines.