The RBI, on Friday, put on its website its report of internal working group that has suggested setting up of dedicated exchanges for currency futures to ensure that regulatory and supervisory control rests solely with the central bank. It has also suggested initially allowing only resident entities to participate in currency futures without any limits.

Price discovery
Once the systems are in place, the group suggested, participation of only two categories of residents outside India — foreign institutional investors (FIIs) and non-resident Indians (NRIs) — and that too only as hedgers through designated banks. It has recommended imposition of suitable position limits on FIIs and NRIs.

Retail participation
In the initial phase to encourage proper price discovery and retail participation, the group has suggested that single contract should have a notional value of $1000 and currency futures maturing in the first 12 calendar months could be offered.

The group advocated that the ownership of the exchanges must be well diversified. The shareholders and directors must satisfy the “fit and proper” criteria. Foreign direct investment (FDI) should not exceed the limits prescribed for financial infrastructure companies, like in stock exchanges.  Additionally, no person would be permitted to hold more than five per cent in the equity capital of the currency futures exchange.

Adequate resources
In stock exchanges, FDI is capped at 26 per cent and a separate ceiling of 25 per cent for FII investments has been stipulated. Eligible exchanges would also need to have adequate financial resources to undertake information technology (IT) up-gradation from time to time and interested existing stock and commodity exchanges would have to set up currency futures exchange as a separate entity.

The RBI panel has also advocated that initially participation in the futures market should be restricted to residents alone,  purely to ascertain the robustness of various systems such as surveillance, monitoring and reporting.