Currency derivatives lose momentum; USE hit hardest

As per the market regulator SEBI’s latest monthly bulletin, the one-month turnover of currency derivatives at the NS) declined by 33% to Rs2,73,114 crore in October. The decline was larger for rival MCX-SX at 37.1%, but the losses were much higher at 63.5% at the USE, the third player in the segment, for the same month

New Delhi: The currency derivatives trading, once touted as the Indian capital market’s next big thing, seems to be bleeding business and the newest kid on the block, the United Stock Exchange (USE), is taking the maximum hit, reports PTI.

As per the market regulator Securities and Exchange Board of India (SEBI’s) latest monthly bulletin, the one-month turnover of currency derivatives at the National Stock Exchange (NSE) declined by 33% to Rs2,73,114 crore in October.

The decline was larger for rival MCX-SX at 37.1%, but the losses were much higher at 63.5% at the USE, the third player in the segment, for the same month, SEBI data shows.

NSE was the first exchange to foray into this segment in August 2008, followed by Bombay Stock Exchange (BSE) and MCX-SX in October that year.

While BSE stopped all its operations in the currency derivatives segment in April 2010, the USE entered this market in September 2010. The BSE is a major shareholder in the USE.

The decline at USE appears much sharper, when seen in the context of the exchange’s initial period trade volumes.

The USE had launched its trading on 20 September 2010 with opening-day volume of 9.88 million contracts, a world record for the first-day trading at a new exchange.

Thereafter, the month-on-month volume grew for quite a few months, but has declined sharply in the recent past.

The USE clocked a record-high trade of over Rs45,000 crore on its first day, but its daily trade value was just Rs264.46 crore in the last trading session on 23rd December.

The monthly trade volumes have also declined sharply in the past four months, which has come as a big surprise for the market players as the USE remains the only exchange not charging any transaction fees on currency derivatives trade.

The two rival exchanges, NSE and MCX-SX, started levying transaction charges on currency derivatives in August.

Incidentally, the USE volumes have been declining sharply since that month, thus defying the theory of zero transaction fee regime being good for this nascent-stage segment.

There are no official words, but speculations are rife that the decline in the USE’s trade volumes was because of an ongoing SEBI probe into the state of affairs at the bourse.

Earlier in October, TS Narayanasami had quit as the managing director of the USE, and the industry sources had attributed his resignation to the differences he had with some other senior management personnel and certain promoters.

The differences are said to have been over the levy of transaction charges, among other issues.

Also, there have been reports about a conflict of interest and a possible breach of fair-trade practices at the USE due to one of its largest shareholders, Jaypee Capital, also being a major trader on the exchange.

The reports had said that about 80% of trade volumes were coming from Jaypee Capital alone.

Industry sources say that the trade volumes might have declined because of Jaypee Capital limiting its exposure due to the SEBI probe.


Volatile upmove ahead: Weekly Market Report

Nifty should make higher lows to reach 4,805

Adverse macro-economic indicators indicating a slowdown, put pressure on the markets in the week. Looking at the dismal performance of various sectors, the depreciation in the value of the rupee and high inflation, the Reserve Bank of India (RBI) plans to revise downwards its growth forecast for the current fiscal in its quarterly policy review next month. However, investors took support from the positive global signals resulting in the market closing higher for the week.

The Sensex settled at 15,739, up 247 points (2%) while the Nifty gained 62 points (1%) to close the week at 4,714. If the Nifty manages to make a higher low, it may touch 4,805, or else it may fall to the level of 4,670.

Domestic concerns and weak Asian markets dragged the indices lower on Monday. Political developments at the Centre resulted in the market closing with a deep cut on Tuesday. Snapping its five-day decline, the market closed with handsome gains on Wednesday on a late rally.

Brisk buying in the second half of trade helped the benchmarks close higher for the second straight day on Thursday. The market closed with a 0.50% loss on Friday on concerns that the GDP growth in the current fiscal will be lower than the RBI’s forecast of 7.6%.

In the sectoral space, the BSE Oil & Gas index and BSE Fast Moving Consumer Goods index, both gained 3%, while BSE Capital Goods declined 3% and BSE Metals fell 2%.

The top Sensex gainers were Tata Motors, ICICI Bank (up 7% each), HDFC, Mahindra & Mahindra (up 6% each) and HDFC Bank (up 5%). The key losers on the index were Jaiprakash Associates (down 9%), Larsen & Toubro, Jindal Steel & Power (down 6% each), Tata Steel (down 5%) and Hero MotoCorp (down 4%).

Tata Motors, SAIL, ICICI Bank, Cairn India (up 7%) and Ranbaxy Laboratories (up 6%) were the key gainers on the Nifty. JP Associates (down 9%), L&T, Jindal Steel & Power, HCL Technologies and IDFC (down 6% each) ended up as top losers in the week.

The RBI said the Indian economy is likely to grow below its projection of 7.6% this fiscal, and is likely to revise downward the forecast in its policy review next month. In October, it had cut the GDP growth forecast for 2011-12 to 7.6%, from 8% earlier.

There are risks to inflation, RBI governor D Subbarao said, adding that high oil prices and the sudden depreciation in rupee pose challenges for the economy.

Food inflation fell sharply to a near four-year low of 1.81% for the week ended 10th December from 4.35% in the previous week. The latest number is the lowest rate of food inflation since the week ended 9 February 2008, when it stood at 2.26%.

“There is the strong base effect, on top of a normal monsoon and good harvest. I believe the moderate rate will continue for at least a month or two and we can expect its impact in the December headline inflation numbers also,” Crisil chief economist DK Joshi said.

However, putting forth a conservative view, Deloitte Haskin & Sells director Anis Chakravarty said, “Both the high base and good production is responsible for moderation in food inflation numbers. However, it is too early to say if this will sustain. We should wait and watch till at least early February before coming to a firm conclusion."

On the international front, better-than-expected economic indicates supported a four-day rally in US stocks Gauges on employment, consumer confidence and housing starts were positive, setting aside concerns about the Eurozone crisis for the time being.

Meanwhile, Europe’s recently created regulator, the European System Risk Board (ESRB) on Thursday warned that the strength of the financial system needed to be improved and called for banks to shore up their balance sheets. In a related development, Standard & Poor’s is expected to announce its report on debt ratings for 15 Eurozone nations next month.


Conciliation works better than arbitration in exchanges, says Joseph Massey

In the equity markets, a frequent complaint is that arbitration as a grievance resolution mechanism usually works against investors. However, Joseph Massey, chief executive and managing director at MCX Stock Exchange (MCX-SX), said that they are resolving more disputes through conciliation and mediation and very few go for arbitration  

Moneylife (ML): Having gone through the MCS-SX website—arbitration does not appears to be the widely used mechanism for solving disputes here. Can this be attributed to mediation and conciliation?
Joseph Massey (JM): At MCX-SX, every dispute goes through the conciliation process first, but if the parties (broker and investor) want to go directly for arbitration they can. They have the right to do so and it cannot be denied by anyone. However, we think if the rights can be preserved by exchange of words then why to go for arbitration.
In most cases, the dispute first comes in the form of a complaint. On receipt of the complaint and evidences from the client (investor) a letter is sent to the broker. If the brokers feel that the complaint is genuine then he out rightly settles the dispute. However, if the broker does not agree with the nature of the complaint, he too can send his evidences and then there is conciliation. Each exchange has a conciliator officer. MCX-SX also has investor protection centres in four metros. The cost for conciliation is borne by the exchange.

If the dispute is not resolved during conciliations, then it goes into arbitration. Depending on the value or disputed amount, both the parties have to deposit some amount with the exchange. Also, the bench of the arbitrators is determined on the value of the disputed amount. Once the arbitration is done, an award is passed which needs to be abided by both the parties.
The payment to the arbitrators is decided by the exchange itself which is around Rs5,000 per hearing. So this process is not at all expensive. The clients do not have to pay money to the arbitrators and it is the exchange that pays them.

This system, which we follow at MCX-SX for grievance redressal is legally considered to be a secure and valid system. The implementation of the award is much easier and quicker than courts. I can say, today’s exchanges are running efficiently because of an efficient and speedy grievance redressal mechanism.

ML: What are the judicial remedies available for a resolving dispute?
JM: One cannot go for judicial remedy because if someone is doing business then he has agreed to the rules and bye-laws of the exchange. The rules and bye-laws say if there is a dispute then the aggrieved party will have to first go for conciliation then arbitration and the appeal at the exchange itself. The judiciary has accepted this redressal method because it is a specialized activity. So for redressing the dispute through the alternate dispute redressal (ADR) at the exchange, the matter can be settled within a month whereas in regular courts it may take more time. Also the Securities Contracts (Regulation) Act, 1956 or SCRA says that each (exchange) should have its own dispute settlement mechanism.
ML: Regulation 14.11 of the MCX Stock Exchange (currency derivatives segment) states no hearing shall be provided to parties if the disputed amount is Rs25,000 or less.  So in such cases is ex-parte the norm?

JM: It has been observed that in some of the arbitrations, either of the party remains absent, which indicates that he may be wrong or that he is not interested in the remedy system. In such cases ex-parte order is the given but before that, we give the party three chances to come forward and be present during the proceedings.

ML: At MCX-SX, how many cases goes into arbitration and what is the time frame for their resolution? How many go into appeal?
At MCX-SX very few cases go for an appeal because ADR works like what we call as fast-track litigation. In an arbitration process, evidence is checked, submissions are made and both sides get an equal opportunity to be heard. So after this rigorous process, when one opts for appeal, the grounds for appealing would be limited because all that he had to say would have already been said during the arbitration. In rare instances one party had gone for an appeal at MCX-SX.

Time taken for completing the arbitration is determined in advance. It has been stated that the arbitration should be completed within three months from the time it begins. However, in few cases the time limit can be increased. Also, there is no pecuniary jurisdiction for taking matters for arbitration.

The appeal is made to the board of the exchange, which comprises public sector representatives, shareholder representatives, and representatives from public sector enterprises nominated by SEBI (Securities and Exchange Board of India). It is therefore a very balanced board.
ML: Has MCX-SX put in place any special regulations or processes to reduce disputes between brokers and investors? What, according to you, are the reasons for dispute in the currency segment?

JM: Cases like settlement of accounts is one of the major reasons for dispute between brokers and investors. Many times this happens if the markets are too volatile, leading to big losses for the investor.

To reduce such disputes, we at MCX-SX have put in a robust risk management system that follows strict norms and procedures. For example, if on a particular day a broker sustains losses of 75% out of his deposited amount with the exchange, he cannot do any further business unless he deposits more money. MCX-SX is the only exchange to have this kind of risk management system. This keeps our exchange safe and so are the brokers and investors. The margins are determined at client level so this gives protection to them as well. This mechanism therefore saves up to 90% of the litigation.



Nagesh Kini FCA

5 years ago

Yes, Mediation is any day the best ADR mechanism. Fast and decisive.

No-No for Arbitration by high profiled justices in paid for travel and 5 star at heavy costs..


5 years ago

Being a mediator and a strong believer in this method of dispute resolution, I find this article rewarding.

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