NISM Series I · Chapter 8: Regulatory Framework for Exchange Traded Currency Derivatives
L1 · FoundationRegulatory Framework — the RBI/SEBI split, the statutes, participation rules and membership criteria
How RBI and SEBI divide the regulation of exchange-traded currency derivatives, the SC(R)A definitions of securities and derivatives, the RBI-SEBI Standing Technical Committee, FEMA and the SEBI Act, the RBI directions, FEDAI, who may participate and on what terms, and the full eligibility criteria for trading and clearing membership.
18 min read · Worth 5% of the paper · Written from pages 188–206 of the official NISM workbook · Updated 18 September 2026
Where this chapter sits
Chapter 8 carries 5% of the paper. It is pure recall: statutes, thresholds and eligibility tables.
Three things dominate. First, how RBI and SEBI split the work. Second, the USD 100 million participation limit. Third, the membership criteria, including Base Minimum Capital.
The division of labour
Exchange-traded currency derivatives are jointly regulated by Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). The exchanges and clearing corporations then write the day-to-day rules in their bye-laws, inside the limits set by RBI and SEBI.
| Entity | Authority / Statute | Scope |
|---|---|---|
| RBI | The Foreign Exchange Management Act, 1999 (FEMA) | Power conferred to Reserve Bank to make regulations to carry out the provisions of this Act... Power conferred to issue direction to Authorized Person |
| RBI | Reserve Bank of India Act 1934 | Dealing in foreign Exchange and Derivatives |
| SEBI | Securities Contract (Regulation) Act 1956; and SEBI Act 1992 | All exchange-traded contracts |
| Exchanges / Clearing Corporation | Bye-laws of the Exchange and Clearing Corporations | Operational rules and procedures for trading, clearing, settlement & risk management |
Which regulator comes first? The workbook answers in one sentence:
RBI's role in regulation of Foreign Exchange Market is primary and fundamental and covers all activities while that of SEBI is limited to the Exchange-traded derivative contracts on them.
In plain words: RBI looks after the whole currency market. SEBI looks after only the exchange-traded contracts.
Two different "authorised persons"
Under FEMA, an authorised person is a currency dealer. The Act lists an authorised dealer, money changer, off-shore banking unit or any other person authorised under sub-section (1) of section 10 to deal in foreign exchange or foreign securities.
SEBI uses almost the same name for something else. The workbook flags the trap: "Authorised Person" defined under FEMA and "Authorized Person" as per SEBI are two different kind of entities.
8.1 Securities Contracts (Regulation) Act, 1956
The SC(R)A provides for direct and indirect control of virtually all aspects of securities trading and the running of Stock Exchanges. It aims to prevent undesirable transactions in securities.
It gives the Central Government regulatory jurisdiction over three things:
- Stock Exchanges, through recognition and continued supervision.
- Contracts in securities.
- Listing of securities on Stock Exchanges.
What counts as "securities"
| Included in "securities" |
|---|
| Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities |
| Derivatives |
| Units or any other instrument issued by any Collective Investment Scheme |
| Security receipt under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 |
| Units or any other instrument issued by any pooled investment vehicle |
| Units... issued to the investors under any mutual fund scheme |
| Certificates issued by a special purpose distinct entity |
| Government Securities |
| Such other instruments as may be declared by the Central Government |
| Rights or interest in securities |
| "Electronic Gold Receipt" |
There is one exclusion. "Securities" shall not include any unit linked insurance policy or similar instrument which provides a combined benefit risk on the life of the persons and investment by such persons and issued by an insurer. So a ULIP is not a security.
What counts as a "derivative"
| "Derivative" includes |
|---|
| a. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security |
| b. a contract which derives its value from the prices, or index of prices, of underlying securities |
| c. commodity derivatives |
| d. such other instruments as may be declared by the Central Government to be derivatives |
Section 18A: why derivatives are legal
Contracts in derivatives shall be legal and valid if such contracts are:
- Traded on a recognized stock exchange.
- Settled on the clearing house of the recognized stock exchange, in accordance with the rules and bye-laws of such stock exchanges.
- Between such parties and on such terms as the Central Government may, by notification in the Official Gazette specify.
This section is why exchange-traded derivatives are enforceable at all.
8.2 The RBI-SEBI Standing Technical Committee
It started with an earlier committee. The Committee on Fuller Capital Account Convertibility had recommended that currency futures may be introduced, as long as risks were contained through proper trading mechanism, contract structure and regulation.
The events then ran in this order:
| Date | What happened |
|---|---|
| Annual Policy Statement 2007-08 | RBI proposed to set up a Working Group on Currency Futures |
| April 20, 2007 | RBI issued comprehensive guidelines on the usage of foreign currency forwards, swaps and options in the OTC market, and set up an Internal working group on currency futures |
| February 28, 2008 | A joint RBI-SEBI meeting decided to form the RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives |
| April 2008 | The Report of the Internal Working Group of RBI recommended exchange traded currency futures |
| May 29, 2008 | The committee submitted its report on Currency Futures |
What the committee was asked to do
| Terms of reference |
|---|
| To coordinate the regulatory roles of RBI and SEBI in regard to trading of Currency and Interest Rate Futures on the Exchanges |
| To suggest the eligibility norms for existing and new Exchanges for Currency and Interest Rate Futures trading |
| To suggest eligibility criteria for the members of such exchanges |
| To review product design, margin requirements and other risk mitigation measures on an on-going basis |
| To suggest surveillance mechanism and dissemination of market information |
| To consider microstructure issues, in the overall interest of financial stability |
What it recommended
- Start currency futures with USDINR as the underlying.
- Risk management measures, including margining and mark to market.
- Surveillance measures and position limits.
- Eligibility criteria for a currency futures segment in an exchange and clearing corporation.
- A separate segment for currency futures, with its own trading platform, clearing corporation and membership.
- Regulatory and legal aspects.
It also set three net worth figures:
| Entity | Balance sheet net worth recommended |
|---|---|
| Exchange | At least Rs. 100 crores |
| Clearing member | Rs 10 crores |
| Trading member | Rs. 1 crore |
The exchange figure is now in law. SEBI (Stock Exchange and Clearing Corporation) Regulation, 2018 specified that every recognised Stock Exchange shall have minimum networth of one hundred crore rupees at all times.
This report became the important point for the introduction of Exchange Traded Currency Derivatives in India.
8.3 FEMA, 1999
FEMA was formulated in 1999, and it replaced FERA (Foreign Exchange Regulation Act). Its purpose is to help facilitate external trade and payments in India, and to help the orderly development and maintenance of the foreign exchange market in India.
It covers the procedures and formalities for foreign exchange: holding it, realising and repatriating it, and all foreign exchange dealings in India.
Foreign exchange transactions fall into two groups: Current Account Transactions and Capital Account Transactions.
FEMA defines Authorised Person, Foreign Exchange, Foreign Currency, Person, Person resident in India and Person resident outside India.
Where it applies. FEMA is applicable to all parts of India. It also reaches branches, offices and agencies outside India owned or controlled by a person resident in India, and any contravention committed outside India by a person the Act applies to.
What it covers. Foreign exchange, foreign securities, export and import of goods and services, securities under the Public Debt Act 1994, banking, financial and insurance services, and Indian citizens living in India or abroad (NRIs).
What it lets RBI do. FEMA empowers RBI to make regulations under the Act. It also lets RBI authorise Authorised Persons, issue directions to them and inspect their books.
8.4 SEBI
SEBI Act, 1992 set up SEBI with statutory powers for three purposes:
- (a) Protecting the interests of investors in securities.
- (b) Promoting the development of the securities market.
- (c) Regulating the securities market.
Protect, develop, regulate: those are the three words to remember.
| SEBI's powers include |
|---|
| Regulating the business in stock exchanges and any other securities markets |
| Registering and regulating the working of stock brokers, authorized person etc. |
| Promoting and regulating self-regulatory organizations |
| Prohibiting fraudulent and unfair trade practices |
| Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds and other persons associated with the securities market |
| Performing such functions and exercising according to Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government |
SEBI can also conduct enquiries, audits and inspections, and adjudicate offences under the Act. It can register, regulate and penalise all market intermediaries.
For this segment in particular: RBI has given the broad guidelines, but SEBI plays a major role in regulating, development of Exchange-traded currency derivatives.
SEBI's trading guidelines
A recognized stock exchange having nationwide terminals, or a new exchange recognised by SEBI, may set up currency derivatives segment after obtaining SEBI's approval. The contracts trade as separate segment of the exchange.
Approval comes in two steps. SEBI approves first. Then the Recognized Stock Exchange and its Clearing Corporation/Clearing House shall make an application to RBI to obtain permission under FEMA for trading, clearing and settlement.
Membership of the Currency Derivatives Segment is separate from the membership of the other segments of the Exchange. Applications follow the SEBI (Stock Brokers) Regulations, 2026.
Banks may also become members, subject to eligibility criteria specified by RBI and SEBI. And every trading member needs approved users and sales personnel who have Certification as applicable.
SEBI's clearing guidelines
- A clearing corporation or clearing house needs SEBI's approval to clear and settle currency derivatives.
- It must perform full novation. That means it steps between both sides of every trade and becomes the legal counterparty to both. The alternative is an unconditional guarantee for settlement of all trades.
- SEBI has allowed interoperability of clearing corporations for currency derivatives segment.
- There will be separate Core Settlement Guarantee Fund (CSGF) for Currency Derivatives Segment.
8.5 RBI's directions
| Direction | Effective | Content |
|---|---|---|
| Currency Futures (Reserve Bank) Directions, 2008 | August 06, 2008 | Definition, eligible currency pairs, eligible participants, contract features, membership criteria for banks, position limits, risk management, authorisation of exchanges and CCs, surveillance and disclosure |
| Exchange Traded Currency Options (Reserve Bank) Directions, 2010 | July 30, 2010 | The same headings, for options |
| Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000 | — | Definitions of Authorised Dealer, Foreign exchange derivative contract, Exchange traded currency derivatives, Hedging, Currency risk, contracted exposure and anticipated exposure; who may enter into such contracts; remittance |
| Master Direction – Risk Management and Inter-Bank Dealings | — | Modalities regarding the conduct of foreign exchange business by the Authorised Persons with their customers/constituents |
Both sets of directions cover the same eight headings. Both name two kinds of eligible pair: FCY-INR pairs (pairs involving Indian Rupee) and Cross currency pairs (FCY-FCY pairs not involving Indian Rupee).
| The Master Direction covers |
|---|
| Definition of Hedging, Users, Contracted and Anticipated Exposure |
| Directions for Authorised Dealers for offering derivatives contract involving INR to users |
| Directions to users for participation and monitoring in Exchange-traded currency derivatives |
| Participation of AD Category I Bank in Exchange traded currency futures and option contracts |
| Operational Guidelines, terms and conditions for AD Category-I banks participation in the ETCD market |
8.5.1 FEDAI
The Foreign Exchange Dealers' Association of India (FEDAI) was set up in 1958. It is an association of banks dealing in foreign exchange (the Authorised Dealers), and it works as a self-regulatory body. It is incorporated under Section 25 of The Companies Act, 1956.
Its main job is to frame the rules for inter-bank foreign exchange business among banks and with the public. It also works with RBI on reforms and the development of the forex market.
| FEDAI's functions |
|---|
| Guidelines and Rules for Forex Business |
| Training of Bank Personnel in the areas of Foreign Exchange Business |
| Accreditation of Forex Brokers |
| Advising/Assisting member banks in settling issues/matters in their dealings |
| Represent member banks on Government/Reserve Bank of India/Other Bodies |
| Announcement of daily and periodic rates to member banks |
Its role has grown with market integration. FEDAI plays a catalytic role for smooth functioning of the markets by working closely with RBI, FIMMDA, the Forex Association of India and market participants.
Recall from Chapter 1 that FEDAI sets market timings: the normal market hours for FCY/INR transactions... is from 9.00 a.m. to 5.00 p.m. IST.
8.6 Who may participate
Residents who buy foreign currency assets face currency risk. So do non-residents who buy Indian assets. That is why the workbook says it is important to have participation from all categories of investor (resident as well as non-resident) in ETCD.
The rules come mainly from FEMA, 1999 and the Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulations, 2000. And one general condition applies to everyone: all regulated entities shall participate in ETCD with the permission of and subject to the terms and conditions, if any, fixed by their respective regulator.
8.6.1 AD Category I banks
An AD Category I bank may become a trading and clearing member, for itself and for clients, if it meets all four prudential tests:
| Test | Requirement |
|---|---|
| Net worth | Minimum Rs. 500 crores |
| CRAR | Minimum 10 per cent |
| Net NPA | Should not exceed 3 per cent |
| Profitability | Net profit for last 3 years |
Some banks can take part only as clients, with approval from the relevant RBI department:
- AD Category I banks that do not meet the four tests.
- AD Category I banks that are Urban Co-operative banks or State Co-operative banks.
Prudential limits. These banks work within Net Open Position (NOP) and Aggregate Gap (AG) limits. The option position of the banks, on their own account, in the exchange-traded currency derivatives shall form part of their NOP and AG limits.
Synthetic positions. A synthetic USD-INR position built from FCY-INR and cross-currency contracts shall have to be within the position limit prescribed by the exchange for the USD-INR contract.
Combining markets. AD Category-I banks may net/offset their positions in the ETCD market against the positions in the OTC derivatives markets. RBI may still set a separate sub-limit of the NOPL just for the OTC market when needed.
8.6.2 Persons resident in India
Users may take positions (long or short), without having to establish existence of underlying exposure, up to a single limit of USD 100 million equivalent across all currency pairs involving INR, put together, and combined across all exchanges.
To go beyond USD 100 million, the user must designate an Authorised Dealer/Custodian. The exchange or clearing corporation then sends that dealer the user's day-end open positions and intra-day highest position at the end of each day.
The onus of complying with the above directions shall rest with the user. A breach makes the user liable to action under FEMA, 1999.
Cross-currency contracts sit outside this INR limit. Participants may trade cross-currency futures and options without having to establish underlying exposure, within the exchange's position limits.
8.6.3 Foreign Portfolio Investors
FPIs get the same USD 100 million single limit across all INR pairs and all exchanges, with no need to establish exposure.
One rule is specific to them: FPIs shall ensure that their short positions at all stock Exchanges across all contracts involving Indian Rupee do not exceed USD 100 million.
Their day-end and intra-day highest positions are reported to their designated Custodian, and the onus of complying... shall rest with the FPIs.
8.6.4 Non-banking financial institutions
NBFCs may take part only as clients and only for the purpose of hedging their underlying forex exposures.
- Currency futures: applicable NBFCs, as clients, for hedging.
- Currency options: only non-deposit taking applicable NBFCs with asset size of ₹500 crore and above, as clients, for hedging.
8.6.5 Primary dealers
Standalone Primary Dealers (SPD) having a minimum Net Owned Fund of ₹250 crore may take part in currency futures.
They may join either as clients or direct trading/clearing members. But SPDs shall trade only on their own account, and they are not permitted to take positions on behalf of clients.
| Pair | SPD position limit (whichever is higher) |
|---|---|
| USD-INR | 15% of the total open interest or USD 50 million |
| EUR-INR | 15% of the total open interest or EUR 25 million |
| GBP-INR | 15% of the total open interest or GBP 25 million |
| JPY-INR | 15% of the total open interest or JPY 1000 million |
These match the proprietary limits for a non-bank stock broker in Chapter 7.
8.6.6 RBI intervention
RBI announced this in a press release dated December 09, 2015. It already intervenes in the forex market to manage excessive volatility and to maintain orderly conditions. As a further step, it has been decided to intervene in the Exchange-Traded Currency Derivatives (ETCD) segment, if required. The data is published in the RBI monthly bulletin, as for OTC intervention.
The January 5, 2024 clarification. RBI reiterated its existing directions: users may take positions up to 100 million dollars equivalent for hedging contracted exposures without the requirement to establish the existence of an underlying exposure.
Read that carefully. While users of currency derivatives are not required to provide evidence of underlying exposure while entering into a currency derivatives contract, they must have such exposure in place.
Not required to prove it. Still required to have it.
8.7 Membership eligibility
The membership of the Currency Derivatives Segment is separate from the membership of the other segments of the Exchange.
Under the SEBI (Stock Brokers) Regulations, 2026, a stock broker must keep the net worth and deposit that SEBI or the exchange specifies. A clearing member or self-clearing member must keep the minimum net worth and deposit specified by SEBI, or more, with the clearing corporation.
Net worth is common; deposits are per segment. Net worth shall be reckoned for all segments/stock exchanges, while the deposit shall be separately calculated segment wise.
One registration. The old rule of registering separately with each exchange or clearing corporation has been done away with. A single registration with any stock exchange/clearing corporation shall be required, with approval from any other exchange you want to operate on. The entity shall be issued one certificate of registration, irrespective of the stock exchange(s)/clearing corporation(s) or number of segment(s).
Base Minimum Capital
BMC is the deposit given by the member of the exchange against which no exposure for trades is allowed.
| Category | BMC Deposit |
|---|---|
| Only Proprietary trading without Algorithmic trading (Algo) | Rs 10 Lacs |
| Trading only on behalf of clients (without proprietary trading) and without Algo | Rs 15 Lacs |
| Proprietary trading and trading on behalf of clients without Algo | Rs 25 Lacs |
| All Brokers with Algo | Rs 50 Lacs |
The rules around it:
- The BMC deposit is meant to meet contingencies in any segment of the Exchange.
- A member on more than one segment of the same exchange pays the highest BMC deposit across various segments, not the sum.
- No exposure is granted against BMC deposit.
- Exchanges may ask for more than the SEBI norms.
- Minimum 50 percent of the deposit shall be in the form of cash and cash equivalents.
Qualifications by constitution
| Constitution | Governing law | Key requirements |
|---|---|---|
| Individual | Securities Contracts (Regulation) Rules, 1957 | Minimum Age: 21 years · Indian Citizen · At least HSC or Equivalent · not less than two years as a partner with, or authorised assistant, remisier or apprentice to, a member |
| Partnership firm | Indian Partnership Act, 1932 | Dominant Promoter Group per exchange norms · at least two partners as designated partners · designated partner 21 years · HSC or equivalent · 2 years' experience |
| LLP | Limited Liability Partnership Act, 2008 | Same pattern: at least two designated partners, 21 years, HSC or equivalent, 2 years' experience, DPG norms |
| Company | Companies Act | Minimum Paid up Equity Capital 30 lakhs · at least two directors as designated directors · 21 years · HSC or equivalent · 2 years' experience · DPG norms |
| Bank | Section 10 of FEMA, 1999 (AD Category - I) | Net worth ₹ 500 crores · CRAR 10 per cent · Net NPA not above 3 per cent · net profit for last 3 years |
For a partnership firm, any change in the shareholding... including that of the said Dominant Promoter Group (DPG)... shall be effected only with the prior permission of Exchange/SEBI.
Certification and disqualification
Certification. At all times, either the proprietor, one designated director or partner, or the Compliance Officer must meet the certification requirements of SEBI or the exchange.
Who cannot be a member. No entity shall be admitted as a member, partner or director of a member if it:
| Disqualification |
|---|
| has been adjudged bankrupt or a receiver order in bankruptcy has been made against him or he has been proved to be insolvent even though he has obtained his final discharge |
| has compounded with his creditors for less than full discharge of debts |
| has been convicted of an offence involving a fraud or dishonesty |
| is engaged as a principal or employee in any business other than that of securities (with named exceptions), unless he undertakes to sever its connections with such business on admission |
| has been at any time expelled or declared a defaulter by any other Stock Exchange or he has been debarred from trading in securities by a Regulatory Authorities like SEBI, RBI etc. |
| incurs such disqualification under the provisions of the Securities Contract (Regulations) Act, 1956 |
| incurs such disqualification consequent to which Exchange determines it to be not in public interest to admit him |
For firms and companies, the test covers everyone: all partners in case of partnership firms, all directors in case of companies.
Fit and proper person
Under Schedule II, SEBI (Intermediaries) Regulations, 2008, there are four criteria:
- (a) Integrity, reputation and character.
- (b) Absence of convictions and restraints order.
- (c) Competence including financial solvency and net worth of the applicant.
- (d) Absence of categorisation as a willful defaulter.
They apply to the applicant or the intermediary, the principal officer [the director, the promoter] and the key management persons by whatever name called.
Authorised persons
Authorized person is not a member of a Stock Exchange but is 'Any person, individual, partnership firm, LLP or body corporate, who is appointed as such by a Stock Broker (including Trading Member) and who provides access to the trading platform of a Stock Exchange as an agent of the Stock Broker'.
Trading members may appoint authorised persons to operate Currency Derivatives Segment workstations with the approval of the exchange. They need specific prior approval for each such person, and the approval is segment specific. The AP must have adequate office space, equipment and manpower.
The workbook links this category to SEBI's 2018 circular on the discontinuation of the sub-broker category.
Think of it like this
RBI owns the currency; SEBI owns the exchange it trades on
Two authorities regulate the same contract, and the boundary between them is stated in a single sentence worth memorising.
RBI's role in regulation of Foreign Exchange Market is primary and fundamental and covers all activities while that of SEBI is limited to the Exchange-traded derivative contracts on them.
RBI's authority flows from two statutes: The Foreign Exchange Management Act, 1999 (FEMA), giving it power... to make regulations to carry out the provisions of this Act and to issue direction to Authorized Person; and the Reserve Bank of India Act 1934, covering dealing in foreign Exchange and Derivatives.
SEBI's flows from two others: Securities Contract (Regulation) Act 1956; and SEBI Act 1992, covering all exchange-traded contracts.
And beneath both: Bye-laws of the Exchange and Clearing Corporations, providing operational rules and procedures for trading, clearing, settlement & risk management.
The approval sequence shows the hierarchy in action. An exchange may set up currency derivatives segment after obtaining SEBI's approval — and then after obtaining SEBI's approval, the Recognized Stock Exchange and its Clearing Corporation/Clearing House shall make an application to RBI to obtain permission under FEMA.
SEBI licenses the market; RBI licenses the currency dealing within it.
Where they meet, they meet formally. It was decided in a joint meeting of RBI and SEBI on February 28, 2008, that an RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives would be constituted, whose first term of reference was to coordinate the regulatory roles of RBI and SEBI.
One trap the workbook flags itself. "Authorised Person" defined under FEMA and "Authorized Person" as per SEBI are two different kind of entities. Under FEMA it means an authorised dealer, money changer, off-shore banking unit — a currency dealer. Under SEBI it is a broker's appointed agent providing terminal access.
You need not prove the exposure, but you must have it
A driver need not carry his licence in his hand at every moment; that does not mean he may drive without one. The RBI's January 2024 clarification makes exactly this distinction, and it corrects a widespread misreading.
Users may take positions (long or short), without having to establish existence of underlying exposure, up to a single limit of USD 100 million equivalent across all currency pairs involving INR, put together, and combined across all exchanges.
Read alone, that sounds like a free speculation allowance. The clarification says otherwise.
In a circular dated January 5, 2024, the RBI has reiterated its existing directions under which Authorized Dealers may allow users of currency derivatives to take position up to 100 million dollars equivalent in notional value for hedging contracted exposures, without the requirement to establish the existence of an underlying exposure.
Thus, the RBI has clarified that while users of currency derivatives are not required to provide evidence of underlying exposure while entering into a currency derivatives contract, they must have such exposure in place. With this circular, the RBI has stressed the importance of a valid hedging requirement for users of currency derivatives.
Documentation is waived. The requirement itself is not.
And the responsibility sits squarely on the user: the onus of complying with the above directions shall rest with the user. In case of any contravention, the user shall render itself liable to any action under the Foreign Exchange Management Act (FEMA), 1999.
Beyond the limit, a watcher is appointed. Exchanges must provide facility to users, intending to take position beyond USD 100 million... to designate an Authorised Dealer/Custodian, and thereafter the exchanges/clearing corporation at end of day shall provide information of day-end open positions as well as intra-day highest position of the user to that entity.
Cross-currency pairs sit outside this regime entirely — contracts not involving Indian Rupee may be traded without having to establish underlying exposure subject to the position limits as prescribed by the exchanges.
Base Minimum Capital is a deposit you can never trade against
A shopkeeper's security deposit with his landlord is real money he cannot spend on stock. BMC works the same way, and the phrase that defines it says so plainly.
BMC is the deposit given by the member of the exchange against which no exposure for trades is allowed.
And again, among the rules: no exposure is granted against BMC deposit.
The four tiers rise with the risk the member brings:
Only Proprietary trading without Algorithmic trading (Algo) — Rs 10 Lacs Trading only on behalf of clients (without proprietary trading) and without Algo — Rs 15 Lacs Proprietary trading and trading on behalf of clients without Algo — Rs 25 Lacs All Brokers with Algo — Rs 50 Lacs
Client money costs more than own money; algorithms cost most of all — which fits the Chapter 6 requirements that algo systems be audited every six months and routed through broker servers located in India.
Across segments it is the highest, not the sum: for members who are registered on more than one segment of the same Exchange, the highest BMC deposit across various segments is applicable.
Half of it must be liquid: minimum 50 percent of the deposit shall be in the form of cash and cash equivalents — the same discipline that governs liquid assets in Chapter 7.
And it is a floor, not a ceiling: the Stock Exchanges shall be permitted to prescribe suitable deposit requirements, over and above the SEBI prescribed norms, based on their perception and evaluation of risks involved.
Keep BMC distinct from net worth. The quantum of networth to be maintained by the stock broker/clearing member... shall be reckoned for all segments/stock exchanges. The quantum of deposit to be maintained... shall be separately calculated segment wise.
Net worth is a balance-sheet test measured once across everything; BMC is cash lodged segment by segment.
A bank that falls short of the four tests may still trade — as a client
Not being licensed to drive a bus does not stop you riding one. The prudential requirements for AD Category I banks decide the capacity in which they may participate, not whether they may participate at all.
AD Category I Banks are permitted to become trading and clearing members of the currency derivatives market of recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfilling the following minimum prudential requirements:
i) Minimum net worth of Rs. 500 crores. ii) Minimum CRAR of 10 per cent. iii) Net NPA should not exceed 3 per cent. iv) Net profit for last 3 years.
All four, not any of them.
And the alternative route: AD Category - I banks, which do not meet the above minimum prudential requirements and AD Category - I banks, which are Urban Co-operative banks or State Co-operative banks, can participate in the exchange traded currency derivatives market only as clients, subject to approval therefor from the respective regulatory Departments of the Reserve Bank.
Note that co-operative banks are excluded from membership by type, regardless of how strong their numbers are.
Once trading, banks face limits from two directions. The AD Category - I banks shall operate within prudential limits, such as Net Open Position (NOP) and Aggregate Gap (AG) limits, and the option position of the banks, on their own account, in the exchange-traded currency derivatives shall form part of their NOP and AG limits.
They may also combine the two markets: AD Category-I banks may net/offset their positions in the ETCD market against the positions in the OTC derivatives markets — though Reserve Bank may however stipulate a separate sub-limit of the NOPL (as a percentage thereof) exclusively for the OTC market as and when required.
One anti-avoidance rule closes an obvious gap: any synthetic USD-INR position created using a combination of exchange traded FCY-INR and cross-currency contracts shall have to be within the position limit prescribed by the exchange for the USD-INR contract.
You cannot build a dollar-rupee position out of two other pairs and escape the dollar-rupee limit.
Everyone may trade; not everyone may trade for others
The chapter answers two different questions that look alike — who may participate, and who may be a member. Confusing them costs marks.
On participation, the door is deliberately wide: it is important to have participation from all categories of investor (resident as well as non-resident) in ETCD, because both residents and non-residents are exposed to currency risk.
Individuals, NRIs, corporates, FPIs, NBFCs, primary dealers and banks may all take positions — subject to their own conditions.
But the terms differ sharply.
Persons resident in India and FPIs may trade up to a single limit of USD 100 million equivalent across all currency pairs involving INR, with FPIs additionally required to ensure that their short positions at all stock Exchanges across all contracts involving Indian Rupee do not exceed USD 100 million.
NBFCs are confined twice over: they shall participate... as clients and only for the purpose of hedging their underlying forex exposures. For options there is even a size gate — non-deposit taking applicable NBFCs with asset size of ₹500 crore and above.
Standalone Primary Dealers with a minimum Net Owned Fund of ₹250 crore may be either as clients or direct trading/clearing members — but SPDs shall trade only on their own account, and they are not permitted to take positions on behalf of clients.
Membership itself is another matter. It requires age 21 years, Indian Citizen status for individuals, at least HSC or Equivalent qualification, not less than two years of relevant experience, the fit & proper person tests of integrity, reputation and character · absence of convictions and restraints order · competence including financial solvency and net worth · absence of categorisation as a willful defaulter, and the BMC deposit.
And the corporate route needs capital: minimum Paid up Equity Capital 30 lakhs, plus at least two directors as designated directors.
So the honest answer to "who can trade currency futures" is everyone; to "who can become a member" it is everyone who qualifies.
Key terms in this chapter
- AD Category I bank prudential requirements
- Minimum net worth of Rs. 500 crores, minimum CRAR of 10 per cent, net NPA not exceeding 3 per cent and net profit for the last 3 years — all four required for trading and clearing membership.
- Base Minimum Capital (BMC)
- The deposit given by a member against which no exposure for trades is allowed — Rs 10 lakh for proprietary-only without algo, Rs 15 lakh for client-only without algo, Rs 25 lakh for both without algo and Rs 50 lakh for any broker using algo, at least half in cash and cash equivalents.
- Currency Futures (Reserve Bank) Directions, 2008
- Effective August 06, 2008, covering the definition of currency futures, eligible currency pairs, eligible participants, contract features, membership criteria for banks, position limits, risk management, authorisation of exchanges and clearing corporations, and surveillance and disclosure.
- Derivative under SC(R)A
- Includes a security derived from a debt instrument, share, loan, risk instrument or contract for differences; a contract deriving value from prices or an index of prices of underlying securities; commodity derivatives; and anything else the Central Government declares to be a derivative.
- Dominant Promoter Group (DPG)
- The controlling group a partnership firm, LLP or company must identify when applying for membership, whose shareholding or sharing interest may be changed only with the prior permission of the Exchange or SEBI.
- Exchange Traded Currency Options (Reserve Bank) Directions, 2010
- Effective July 30, 2010, covering the same eight headings as the futures directions but for exchange-traded currency options.
- FEDAI
- The Foreign Exchange Dealers' Association of India, set up in 1958 under Section 25 of the Companies Act, 1956 as a self-regulatory association of authorised dealer banks — framing forex business rules, training bank personnel, accrediting forex brokers and announcing daily rates.
- FEMA, 1999
- The Act replacing FERA, formulated to facilitate external trade and payments and to promote the orderly development and maintenance of the foreign exchange market, empowering RBI to make regulations, authorise persons, issue directions and inspect their books.
- Fit and proper person
- Assessed under Schedule II of the SEBI (Intermediaries) Regulations, 2008 on integrity, reputation and character; absence of convictions and restraints orders; competence including financial solvency and net worth; and absence of categorisation as a wilful defaulter.
- Full novation requirement
- SEBI's condition that the clearing corporation interpose itself between both legs of every trade, becoming the legal counterparty to both — or alternatively provide an unconditional guarantee for settlement of all trades.
- NBFC participation
- NBFCs may participate in currency futures only as clients and only to hedge underlying forex exposures; for currency options only non-deposit taking NBFCs with asset size of ₹500 crore and above qualify, on the same terms.
- RBI-SEBI Standing Technical Committee
- Constituted after the joint meeting of February 28, 2008 to coordinate the two regulators' roles, suggest eligibility norms for exchanges and members, review product design and margins, and consider surveillance and microstructure issues. It reported on May 29, 2008.
- Section 18A, SC(R)A
- The provision making derivative contracts legal and valid if traded on a recognized stock exchange, settled on its clearing house under its rules and bye-laws, and between such parties and on such terms as the Central Government notifies.
- Standalone Primary Dealer participation
- SPDs with a minimum Net Owned Fund of ₹250 crore may participate as clients or as direct trading or clearing members, but may trade only on their own account and never on behalf of clients.
- Synthetic USD-INR position rule
- Any synthetic USD-INR position created by combining exchange-traded FCY-INR and cross-currency contracts must remain within the position limit prescribed by the exchange for the USD-INR contract itself.
- The January 5, 2024 clarification
- RBI's reiteration that while users need not provide evidence of underlying exposure when entering a currency derivatives contract, they must actually have such exposure in place.
- The RBI/SEBI split
- RBI's role in regulating the foreign exchange market is primary and fundamental and covers all activities, while SEBI's is limited to the exchange-traded derivative contracts on them.
- The user single limit
- USD 100 million equivalent across all currency pairs involving INR, put together and combined across all exchanges, taken without establishing an underlying exposure — beyond which the user must designate an Authorised Dealer or Custodian.
Check you have understood it
The L1 test for this chapter has 6 questions. Score 60% to unlock L2 Application (worked numericals and scenarios) and then L3 Exam-Ready (NISM-style traps, timed, with this paper's real marking). Tests, the higher levels and full mock exams need a free account so we can track your progress.
Create a free accountOriginal explanatory writing based on the official NISM workbook for Series I, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.