RBI-SEBI Standing Technical Committee

Currency derivatives sit on a regulatory border. The RBI governs the foreign exchange market under FEMA and the RBI Act. SEBI governs exchange-traded contracts under the SCRA and the SEBI Act. A currency future traded on a stock exchange falls under both. Before such a product could launch, the two regulators needed a common table.

That table was the RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives, constituted following a joint RBI-SEBI meeting on 28 February 2008. To begin with, it was to evolve norms and oversee the implementation of exchange-traded currency futures.

Its report on currency futures, submitted on 29 May 2008, set out the product design, risk management, surveillance and eligibility framework. The workbook calls that report the important point for the introduction of Exchange Traded Currency Derivatives in India.

How it came about (Chapter 8, section 8.2):

Terms of reference:

1. Coordinate the regulatory roles of RBI and SEBI in trading of currency and interest rate futures on exchanges
2. Suggest eligibility norms for existing and new exchanges
3. Suggest eligibility criteria for members of such exchanges
4. Review product design, margin requirements and other risk mitigation measures on an ongoing basis
5. Suggest surveillance mechanism and dissemination of market information
6. Consider microstructure issues, in the overall interest of financial stability

What its report recommended: USD-INR as the first underlying; risk management including margining and mark to market; surveillance and position limits; eligibility for a currency futures segment; a separate segment with separate trading platform, clearing corporation and membership; exchange net worth of at least Rs 100 crore; trading member net worth of Rs 1 crore and clearing member net worth of Rs 10 crore; and regulatory and legal aspects.

Illustrative. The applicants and their figures are hypothetical; the thresholds are those in the committee's 2008 report as the workbook records them.

Apply the report's net worth recommendations to three applicants for a new currency futures segment:

Shortfall for clearing membership = 10 − 4 = Rs 6 crore

Ganga could trade but would need a separate clearing member to clear its trades, or would have to raise Rs 6 crore of net worth first.

One of those figures is still current. The workbook's footnote records that the SEBI (Stock Exchange and Clearing Corporation) Regulations, 2018 require every recognised stock exchange to have a minimum net worth of Rs 100 crore at all times. The member figures, by contrast, are the committee's 2008 recommendations; Chapter 8 describes today's member net worth and deposits as those specified by SEBI and the exchanges from time to time.

Chapter 8 (Regulatory Framework for Exchange Traded Currency Derivatives) lists the role of the committee as its first learning objective and covers it in section 8.2: the background, the 28 February 2008 joint meeting, the six terms of reference, the 29 May 2008 report and its recommendations. Expect date questions, a question on which currency pair came first, and one on the terms of reference.

• Constituted after a joint meeting on 28 February 2008; report on currency futures submitted 29 May 2008. Keep the two dates apart.
• It covers currency and interest rate derivatives, though it began with currency futures.
• USD-INR was the first underlying it recommended.
• It coordinates RBI and SEBI; it is not a third regulator. RBI's role in the forex market remains primary; SEBI's is limited to exchange-traded contracts.
• Rs 100 crore exchange net worth survives in the 2018 SECC Regulations. The Rs 1 crore / Rs 10 crore member figures are the 2008 recommendations, not necessarily today's requirement.
• The timeline is not in date order in the workbook: the Internal Working Group reported in April 2008, after the joint meeting of February 2008. Do not assume the committee came out of that report.