A currency future(FX future) (by Mr. Varun Aggarwal)

A currency future, also known as FX future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. In India, on NSE the price of a future contract is in terms of INR per unit of other currency e.g. US Dollars. Currency future contracts allow investors to hedge against foreign exchange risk. Currency Derivatives are available on four currency pairs viz. US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). Currency options are currently available on US Dollars.

NSE was the first exchange to have received an in-principle approval from SEBI for setting up currency derivative segment. The exchange launched its currency futures trading platform on 29th August, 2008. Currency futures on USD-INR were introduced for trading and subsequently the Indian rupee was allowed to trade against other currencies such as euro, pound sterling and the Japanese yen. Currency Options was introduced on October 29, 2010.

National Securities Clearing Corporation Limited (NSCCL) is the clearing and settlement agency for all deals executed on the Currency Derivatives segment. NSCCL acts as legal counter-party to all deals on NSE's Currency Derivatives segment and guarantees settlement.

A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members (TM) on NSE, who clear and settle such deals through them.

Settlement of daily mark to market is carried out on T+1 day basis.

Final Settlement is carried out on T+2day basis.

Members with a funds pay-in obligation are required to have clear funds in their primary clearing account on or before 8.30 a.m. on the settlement day. The payout of funds is credited to the primary clearing account of the members thereafter.

Daily Settlement Price for mark to market settlement of futures contracts

Daily settlement price for futures contracts is the closing price of such contracts on the trading day. The closing price for a futures contract shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.

Theoretical daily settlement price for unexpired futures contracts which are not traded during the last half an hour on a day

Theoretical daily settlement price for unexpired futures contracts, which are not traded during the last half an hour on a day, shall be the price computed as per the formula:

F₀=S₀ e^(r-r) f^T

where:

F0 = Theoretical futures price
S0 = Value of the underlying
r = Cost of financing (using continuously compounded interest rate)
rf = Foreign risk free interest rate
T = Time till expiration
e = 2.71828

Rate of interest (r) may be the relevant MIFOR rate or such other rate as may be specified by the Clearing Corporation from time to time.

Foreign risk free interest rate is the relevant LIBOR rate or such other rate as may be specified by the Clearing Corporation from time to time.

Final Settlement Price for mark to market settlement of futures contracts:

Final settlement price for a futures contract for the various currencies shall be as mentioned below, or as may be specified by the relevant authority from time to time.

	USDINR	EURINR	GBPINR	JPYINR
Final settlement price	RBI reference rate	RBI reference rate	Exchange rate published by RBI in its Press Release captioned RBI reference Rate for US$ and Euro	Exchange rate published by RBI in its Press Release captioned RBI reference Rate for US$ and Euro

Settlement of futures contracts on currency

Daily Mark-to-Market Settlement

The position in the futures contracts for each member is marked-to-market to the daily settlement price of the futures contracts at the end of each trade day.

The profits/ losses are computed as the difference between the trade price or the previous day's settlement price, as the case may be, and the current day's settlement price. The CMs who have suffered a loss are required to pay the mark-to-market loss amount to NSCCL, which is passed on to the members who have made a profit. This is known as daily mark-to-market settlement.

Theoretical daily settlement price for unexpired futures contracts, which are not traded during the last half an hour on a day, is currently the price computed as per the formula.

After daily settlement, all the open positions are reset to the daily settlement price.

CMs are responsible to collect and settle the daily mark to market profits/losses incurred by the TMs and their clients clearing and settling through them. The pay-in and pay-out of the mark-to-market settlement is on T+1 day (T = Trade day). The mark to market losses or profits are directly debited or credited to the CMs clearing bank account.

Final Settlement

On the expiry of the futures contracts, NSCCL marks all positions of a CM to the final settlement price and the resulting profit / loss is settled in cash.

The final settlement profit / loss is computed as the difference between trade price or the previous day's settlement price, as the case may be, and the RBI reference rate of the such futures contract on the last trading day.

Final settlement loss/ profit amount is debited/ credited to the relevant CMs clearing bank account on T+2 day (T= last trading day).

Open positions in futures contracts cease to exist after their last trading day.

NSCCL has developed a comprehensive risk containment mechanism for the Currency derivatives segment. The most critical component of a risk containment mechanism for NSCCL is the online position monitoring and margining system. The actual margining and position monitoring is done on-line, on an intra-day basis. NSCCL uses the SPAN' (Standard Portfolio Analysis of Risk) system for the purpose of margining, which is a portfolio based system.

Initial Margin

NSCCL collects initial margin up-front for all the open positions of a CM based on the margins computed by NSCCL-SPAN'. A CM is in turn required to collect the initial margin from the TMs and his respective clients. Similarly, a TM is required to collect upfront margins from his clients.

Initial margin requirements are based on 99% value at risk over a one day time horizon. However, in the case of futures contracts, where it may not be possible to collect mark to market settlement value, before the commencement of trading on the next day, the initial margin is computed over a two-day time horizon, applying the appropriate statistical formula. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to time.

Initial margin requirement for a member:

• For client positions - is netted at the level of individual client and grossed across all clients, at the Trading/ Clearing Member level, without any setoffs between clients.
• For proprietary positions - is netted at Trading/ Clearing Member level without any setoffs between client and proprietary positions.

For the purpose of SPAN Margin, various parameters are specified from time to time.

In case a trading member wishes to take additional trading positions his CM is required to provide Margin deposit to NSCCL. MD can be provided by the members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts and approved securities & Government securities.

Extreme loss margin:

Clearing members are subject to extreme loss margins in addition to initial margins. The applicable extreme loss margin on the mark to market value of the gross open positions is as follows or as may be specified by the relevant authority from time to time.

USDINR	EURINR	GBPINR	JPYINR
1% of the value of gross open position	0.3% of the value of gross open position	0.5% of the value of gross open position	0.7% of the value of gross open position

Contract Specifications - FUTURES

Symbol		USDINR	EURINR	GBPINR	JPYINR
Market Type		N	N	N	N
Instrument Type		FUTCUR	FUTCUR	FUTCUR	FUTCUR
Unit of trading		1 - 1 unit denotes 1000 USD.	1 - 1 unit denotes 1000 EURO.	1 - 1 unit denotes 1000 POUND STERLING.	1 - 1 unit denotes 100000 JAPANESE YEN.
Underlying / Order Quotation		The exchange rate in Indian Rupees for US Dollars	The exchange rate in Indian Rupees for Euro.	The exchange rate in Indian Rupees for Pound Sterling.	The exchange rate in Indian Rupees for 100 Japanese Yen.
Tick size		0.25 paise  or INR 0.0025
Trading hours		Monday to Friday 9:00 a.m. to 5:00 p.m.
Contract trading cycle		12 month trading cycle.
Last trading day		Two working days prior to the last business day of the expiry month at 12 noon.
Final settlement day		Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.
Quantity Freeze		10,001 or greater
Base price		Theoretical price on the 1st day of the contract. On all other days, DSP of the contract.	Theoretical price on the 1st day of the contract. On all other days, DSP of the contract.	Theoretical price on the 1st day of the contract. On all other days, DSP of the contract.	Theoretical price on the 1st day of the contract. On all other days, DSP of the contract.
Price operating range	Tenure upto 6 months	+/-3 % of base price.
	Tenure greater than 6 months	+/- 5% of base price.
Position limits	Clients	higher of 6% of total open interest or USD 10 million	higher of 6% of total open interest or EURO 5 million	higher of 6% of total open interest or GBP 5 million	higher of 6% of total open interest or JPY 200 million
	Trading Members	higher of 15% of the total open interest or USD 50 million	higher of 15% of the total open interest or EURO 25 million	higher of 15% of the total open interest or GBP 25 million	higher of 15% of the total open interest or JPY 1000 million
	Banks	higher of 15% of the total open interest or USD 100 million	higher of 15% of the total open interest or EURO 50 million	higher of 15% of the total open interest or GBP 50 million	higher of 15% of the total open interest or JPY 2000 million
Initial margin		SPAN Based Margin
Extreme loss margin		1% of MTM value of gross open position	0.3% of MTM value of gross open position	0.5% of MTM value of gross open position	0.7% of MTM value of gross open position
Calendar spreads		Rs.400 for spread of 1 month Rs.500 for spread of 2 months Rs.800 for spread of 3 months Rs.1000 for spread of 4 months and more	Rs.700 for spread of 1 month Rs.1000 for spread of 2 months Rs.1500 for spread of 3 months and more	Rs.1500 for spread of 1 month Rs.1800 for spread of 2 months Rs.2000 for spread of 3 months and more	Rs.600 for spread of 1 month Rs.1000 for spread of 2 months Rs.1500 for spread of 3 months and more
Settlement		Daily settlement  :  T + 1 Final  settlement :  T + 2
Mode of settlement		Cash settled in Indian Rupees
Daily settlement price (DSP)		Calculated on the basis of the last half an hour weighted average price.
Final settlement price (FSP)