ETCD (Syllabus: GS Paper 3 – Economy)

Context: The Reserve Bank of India (RBI) has not materially changed its stance on exchange-traded rupee derivatives and neither has it asked brokerages for proof of their clients' underlying forex exposure

Exchange-Traded Currency Derivatives

• About: These are financial contracts enabling speculation on future price movements of currency pairs, traded on exchanges, and based on underlying currency exchange rates.
• Risk Management: They aid companies in managing currency risks by hedging against adverse exchange rate movements.
• Profit Potential: ETCDs offer traders the potential to profit from anticipated movements in exchange rates.
• Market Characteristics: The ETCD market is highly liquid with transparent price discovery mechanisms.
• Cost Efficiency: ETCDs have lower margin requirements and are cheaper compared to other derivative products.
• Usage in Trading: Brokers and traders utilize ETCDs to speculate on dollar-rupee futures contracts.

Present Controversy Surrounding Forex Derivative Contracts

• RBI's Unchanged Stance: The Reserve Bank of India (RBI) has not materially altered its stance on External Commercial Borrowing (ECB) Trade Credit Derivatives (ETCD) nor requested proof of underlying forex exposure from brokerages.
• Concerns Raised by Brokers: Brokers have raised concerns about the impact of RBI's announcement in January regarding forex derivative contracts.
• Brokerages' Perspective: According to a Reuters report, brokerages claim to have implemented this requirement voluntarily for hedging purposes, particularly involving the rupee.