Friday, September 5, 2008

Currency Futures Trading is Live

Excerpts from the speech of Finance Minister inaugurating the trading of Currency Futures on NSE, India.
It's a proud day today and I stand before you to dedicate to the financial services community, a new product - Currency Futures. May I begin by warmly thanking the Reserve Bank of India and Securities Exchange Board of India for jointly developing this product and I congratulate the National Stock Exchange for having the distinction of being the first exchange to commence its trade. I wish all success to NSE and I am hopeful that the other two exchanges which have received in-principle approval and other exchanges will soon offer this product.

I see before me on the screen the first trades that is being put through. I am not a trader and I can't qualify ever to become a trader, but if it makes any sense and I am sure it does to a large number of you. Someone is buying at 43.8250 and someone is selling at 43.8400, hope one of them at least makes a profit.

In today's globalised and integrated business environment, many entities are impacted by currency risk either directly or indirectly. Exchange traded currency futures market provides an excellent opportunities to hedge currency risk for different kinds of participants.

The electronic nation wide trading facility, with the backbone of efficient clearing mechanism and efficient risk management system, will benefit universal participants including corporates, banks and individual investors.

As Shri. Ravi Narain mentioned, currency futures contract will be allowed, to begin with, only for USD / Rupee. and for participations by Indian residents. The regulations would with experience gained in the functioning market, consider how and when it can further open up for trading in other currencies as well as for permitting participation by foreign institutional investors and non-resident Indians. I see this as an important step towards going forward on financial innovation in the country. History shows that financial innovation has been a critical and persistent part of the economic landscape over the past few centuries.

Financial markets have continued to produce a multitude of new products including many new forms of derivatives, alternative risk transfer products, exchange traded funds and variants of equity. We in India have adopted all these slowly, some of these products but with considerable success. However, I may note that many years after these ideas were mooted we had to wait. For example, stock index futures took 5 years to be offered to investors after it was first conceived; exchange traded funds for Gold took 4 years to become a reality; interest rate derivatives though launched in 2003 have not taken off. These experiences highlight the risky environment that financial innovation faces in this country. This should change.

Galileo I believe said doubt is the father of invention; if I may add, doubting Thomases are impediments to progress.

We need to continue to innovate and improve in the design of financial products, its customer service as well as all India delivery. I hope this will be kept in mind when regulators review the next steps on the exchange traded futures markets. I urge them to move rapidly and with an open mind that are necessary in such situations. After having launched currency Futures we need to revitalize the exchange traded interest rate derivatives market. We need to offer exchange traded credit derivatives and we need to strengthen the corporate bond market.

These three products are high on the priority list of government and I ask the co-operation and support of RBI and SEBI and others to move forward rapidly. These 3 markets are important (Bond, Currency and Derivatives), it is important that these markets develop rapidly in-order to attract domestic and foreign participation have vibrant trading in spot and derivatives, have healthy speculation and arbitrage to ensure liquidity.

As Shri. Bhave cautioned, some of these products are indeed complex. But the complexity of the products should not deter us from making a beginning. Everybody has a responsibility to explain the complexity of the products to the customers, so that the customers can chose the products that he or she desires. We need to draw the right lessons from developments around the world. We need to innovate, while the same time we need to ensure that the complexities are understood, the risks are mitigated and there is reward for those who are willing to take the risk.

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