ETCD (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     4th April 2024        

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.