Currency Derivatives Segment
Also written CDS · Currency Derivatives Segment (CDS)
The separate stock exchange segment where exchange-traded currency futures and options, and interest rate derivatives, are traded — with membership separate from the exchange's other segments.
In plain language
A stock exchange is not one market but several. Equity shares trade in one segment, equity futures and options in another, commodity derivatives in another. Exchange-traded currency derivatives (ETCD) have their own: the Currency Derivatives Segment, or CDS.
Two things about it trip candidates up. First, it is not only for currencies. The workbook states that along with ETCD, exchange-traded interest rate derivatives are also traded in Currency Derivatives Segment. Second, being a member of the exchange is not enough to trade in it: membership of the CDS is separate from membership of the other segments.
The segment exists because regulators wanted it that way from the start. When the RBI-SEBI Standing Technical Committee recommended currency futures in 2008, it suggested a separate segment for currency futures with separate trading platform, clearing corporation and membership from other segments. NSE launched its currency futures platform in August 2008, in exactly such a segment.
How it works
What trades there, and since when (Chapters 3 and 4):
| Year | Product |
|---|---|
| August 2008 | USD-INR futures (NSE's CDS launch) |
| 2010 | First exchange-traded currency option, on USD-INR; later EUR-INR, GBP-INR, JPY-INR |
| February 2010 | Futures on EUR-INR, GBP-INR and JPY-INR |
| 2018 | Cross currency futures on EUR-USD, GBP-USD and USD-JPY |
Exchange-traded interest rate derivatives trade alongside them. Because ETCD and ETIRD are both part of the CDS, a clearing member's funds obligation is netted across the two, giving a single pay-in or pay-out for the day.
Setting one up (Chapter 8). A recognised stock exchange with nationwide terminals, or a new exchange recognised by SEBI, may set up a CDS after SEBI's approval, as a separate segment. The exchange and its clearing corporation then apply to the RBI for permission under FEMA for trading, clearing and settlement of currency derivatives.
Joining it. Membership is separate from other segments, applied for under the SEBI (Stock Brokers) Regulations, 2026. The member's net worth requirement is reckoned for all segments together, while its deposit is calculated segment-wise. AD Category-I banks may become trading and clearing members if they have net worth of at least Rs 500 crore, CRAR of at least 10 per cent, net NPA not above 3 per cent, and net profit for the last 3 years. Authorised persons need exchange approval for each person, and that approval is segment specific.
A worked example
Illustrative. The broker, the bank and their figures are hypothetical; the thresholds are the workbook's.
A broker adds the CDS. Pratap Securities trades on its own account and for clients, without algorithms, in the equity segment of an exchange. It now wants to offer USDINR futures.
- It must apply for membership of the Currency Derivatives Segment; its equity membership does not carry over.
- Its net worth is assessed across all segments together, but its deposit is worked out segment by segment.
- For base minimum capital, a member on more than one segment of the same exchange maintains the highest BMC deposit across its segments. For proprietary-and-client trading without algorithms, that is Rs 25 lakh, of which at least 50 per cent must be cash or cash equivalents:
Minimum cash component = 25,00,000 × 50% = Rs 12,50,000
A bank applies directly. Coastal Bank, an AD Category-I bank, reports:
| Test | Requirement | Coastal Bank | Result |
|---|---|---|---|
| Net worth | At least Rs 500 crore | Rs 640 crore | Pass |
| CRAR | At least 10% | 12.4% | Pass |
| Net NPA | Not above 3% | 3.6% | Fail |
| Net profit | Last 3 years | Yes | Pass |
One failed test is enough: it cannot become a trading and clearing member of the CDS until net NPA is back within 3 per cent.
Why NISM asks about it
Chapter 6 (Trading Mechanism in Exchange Traded Currency Derivatives) introduces the CDS and the interest rate derivatives traded in it; Chapter 3 gives the August 2008 launch and product history, Chapter 4 the options history; Chapter 7 nets ETCD and ETIRD funds obligations within it; Chapter 8 covers SEBI and RBI approval, separate membership, the bank criteria and the committee's original recommendation. Expect recall questions on what trades in the segment, whose approval is needed, and whether membership is separate.
Common exam traps
- Interest rate derivatives trade in the CDS too. It is not a currency-only segment.
- Membership is separate from the exchange's other segments — even for an existing equity broker.
- SEBI approves the segment; RBI grants permission under FEMA for trading, clearing and settlement. Both are needed.
- Net worth is reckoned across all segments; deposits are segment-wise.
- AD Category-I bank criteria: Rs 500 crore net worth, 10% CRAR, net NPA up to 3%, profit for 3 years.
- History vs today. The 2008 committee proposed separate platform, clearing corporation and membership, with member net worth of Rs 1 crore (trading) and Rs 10 crore (clearing). Chapter 8 now describes a single SEBI registration with one certificate irrespective of exchanges or segments, with CDS membership still separate. Answer with the current rule unless the question asks what the committee recommended.
Check yourself
1.A trading member wants to give its new dealer, Meenal, access to the trader workstation for the currency derivatives segment. Which certification must she have passed?
- a)NISM-Series-VIII: Equity Derivatives only
- b)Any NISM certification, since the requirement is generic
- c)NISM-Series-I: Currency Derivatives or NISM-Series-XIII: Common Derivatives
- d)No certification — only the trading member itself needs to be registered
Show the answer
Answer: (c) NISM-Series-I: Currency Derivatives or NISM-Series-XIII: Common Derivatives
The workbook: "To get access to the trading system, a dealer (who will enter deals in the trading system) of the trading member should successfully pass the NISM-Series-I: Currency Derivatives or NISM-Series-XIII Common Derivatives Certification Examination." Section 6.2.1 repeats it: the TWS dealer "should be successfully certified in the specific module of NISM."
Why the others are wrong:
- Series VIII (Equity Derivatives) does not cover this segment. The workbook names only Series I and Series XIII.
- "Any NISM certification" — the workbook requires the specific module, not any certificate.
- No certification — the requirement applies to the dealer personally, not only to the member firm.
2.Which of the following may become a member of the Currency Derivatives Segment of an exchange?
- a)All of the above
- b)An individual
- c)An AD Category I bank
- d)A corporate
Show the answer
Answer: (a) All of the above
All three have a route, each with its own conditions.
Individual trading membership requires Minimum Age: 21 years · Indian Citizen · At least HSC or Equivalent qualification and an experience of not less than two years as a partner with, or an authorized assistant or authorized remisier or apprentice to a member.
Corporations/companies need minimum Paid up Equity Capital 30 lakhs, identification of at least two directors as designated directors who would be managing the day to day trading operations, each at least HSC or equivalent qualification and with a minimum of 2 years' experience.
AD Category I banks are admitted subject to four tests: Minimum net worth of ₹ 500 crores · Minimum CRAR of 10 per cent · Net NPA should not exceed 3 per cent · Made net profit for last 3 years. And SEBI has also allowed Banks to take membership of ETCD subject to eligibility criteria specified by RBI and SEBI.
Partnership firms and LLPs also qualify, under the Indian Partnership Act, 1932 and the Limited Liability Partnership Act, 2008 respectively.
All are subject to the same overarching tests: age, capital adequacy, financial track record, education, experience and fulfillment of criteria of "fit & proper person" as laid down in the SEBI (Intermediaries) Regulations, 2008.
And the segment stands alone: the membership of the Currency Derivatives Segment is separate from the membership of the other segments of the Exchange.
Note who cannot be a member. AD Category - I banks, which are Urban Co-operative banks or State Co-operative banks, can participate... only as clients, as can NBFCs — and anyone adjudged bankrupt, convicted of an offence involving a fraud or dishonesty or expelled or declared a defaulter by any other Stock Exchange.
3.Through which process does the Clearing Corporation become the legal counterparty to every trade in the currency derivatives segment?
- a)Multilateral netting
- b)Margin pledge
- c)Novation — it becomes the buyer to every seller and the seller to every buyer
- d)Assignment
Show the answer
Answer: (c) Novation — it becomes the buyer to every seller and the seller to every buyer
The workbook: the Clearing Corporation "acts as a legal counterparty to all trades through the process called novation. Thus, the Clearing Corporation becomes the buyer to every seller and seller to every buyer. If there is a default in this scenario, the Clearing Corporation being a central counter party, is responsible for ensuring the settlement."
Why the others are wrong:
- Multilateral netting determines each clearing member's net settlement obligations. It is how clearing is done, not how the CC becomes counterparty.
- Margin pledge is the depository mechanism by which clients pledge securities as collateral.
- Assignment is the random allocation of exercised options to short positions.
Where this is taught
Free preparation for NISM Series IVRelated terms
- Base Minimum CapitalThe deposit every trading member must keep with the exchange purely to meet contingencies — it earns the member no trading exposure at all, and its size depends on what kind of trading the member does.
- Authorised personTwo different entities share this name: under SEBI, an agent appointed by a stock broker to give clients access to the trading platform; under FEMA, a dealer authorised by RBI to deal in foreign exchange.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Currency futuresA standardised exchange-traded contract to buy or sell one currency against another on a future date at a price fixed today; in India, cash-settled in rupees, USD 1,000 a lot for USDINR.
- Interest Rate FuturesA standardised exchange-traded contract to buy or sell a notional government security, or an interest rate itself, at a price agreed today for settlement on a future date.
- RBI-SEBI Standing Technical CommitteeThe joint committee constituted after an RBI-SEBI meeting on 28 February 2008 to coordinate the regulators on exchange-traded currency and interest rate futures; its May 2008 report launched currency futures.
- Credit Default SwapA contract in which a protection buyer pays a regular premium to a protection seller, who agrees to pay any loss in value on a specified reference obligation if a credit event such as default occurs.
- Foreign exchange derivative contractUnder the FEMA regulations, a financial contract that derives its value from a change in the exchange rate of two currencies, at least one of which is not the rupee, and settles later than the spot date.
- Cross currency derivativesIn the exchange traded context, derivatives on a currency pair not involving the Indian rupee — EURUSD, GBPUSD and USDJPY futures and options, introduced from 2018.