Buying, Selling US Dollars? RBI Plans to Cut Charges Substantially via Spot Trading Platform
The Reserve Bank of India (RBI) is working on an electronic spot trading platform for retail customers who need to buy or sell foreign currency like the US dollar.
RBI is now open to allow retail customers to exchange any amount on this platform being developed by Clearing Corp of India (CCIL), says a news report.
The report from Business Standard
, quoting Foreign Exchange Dealers’ Association of India, says customer registration will start on 1st July and trading will start on 5 August 2019.
“The RBI and CCIL want to ensure there is enough customer onboarding for effective trading and so, registration will start a month in advance. The amount can be anything the RBI decides. The CCIL can settle transaction of even one rupee,” "the report says quoting a source.
Currently, the clearing corporation operates an interbank USD/Indian Rupee spot trading platform named FX-CLEAR. The same platform can be modified to allow retail customers of the member banks. This retail market platform will be separate from the one used for interbank market.
At present, a retail customer has to pay commission while buying or selling foreign currencies at the bank. For buying, the customer has to pay 2% premium, while for selling the banks charge 2% of the amount as discount. In both cases, the customer has to bear the cost of exchanging foreign currency (forex). In addition, if the customer use credit card for forex exchange, she is charges an additional 3% charge.
RBI's new initiative is a fallout of its discussion paper issued in October 2017. In the paper, RBI had proposed a mechanism for improving pricing outcome for retail user. Under this mechanism, client pricing is directly determined in the market by providing customers with access to an inter-bank electronic trading platform where bid and offers from clients and authorised dealer banks can be matched anonymously and automatically.
"This is likely to provide transparency while enhancing competition leading to better pricing for all types of customers, without differentiating them on the basis of order size. Direct execution by the customer is likely to bring down the cost of transactions as there is no market risk to the customer’s bank apart from settling the inter-bank trade through the CCIL settlement system. Banks may charge their customers a fee towards processing expenses. Banks will be required to publicly declare such fees," RBI had said in the discussion paper.
The central bank feels that direct execution by the customer would help bringing down the cost of transactions as there is no market risk to the customer’s bank apart from settling the inter-bank trade through the CCIL settlement system. Banks may charge their customers a fee towards processing expenses, it says adding banks will be required to publicly declare such fees.
How will the forex exchange trading platform work?
1. The customer registers for the forex trading platform facility on a specified portal and will share permanent account number and bank account details. The customer’s bank will set up the limit for forex trading, and share it with CCIL, which in turn will send login details to the customer.
2. The retail customer will access the platform through her authorised dealer bank and place bid (buy)/offer (sell). The system will display interbank rates prevailing at the time. However, since the retail orders would be processed in a lot of $500,000, the interbank rate for the currency may be different from what is displayed while placing the order.
3. Customer can directly execute the trade up to the limit by placing bid/offer quotes. Trades will be executed by anonymous order matching on price-time priority.
4. Buy orders on the retail platform will be matched against sell orders therein and vice versa. The system will have a functionality to aggregate customer orders at the same rate up to the minimum lot size of the interbank market (currently $5,00,000) and match it with the orders in the interbank market. This will ensure that prices in both the markets are in line.
5. Each matched trade of the customer would result in two transactions i.e. one between the customer and its bank and another between the customer’s bank and the counterparty bank except in cases where the customer orders are executed between the customer and customer’s bank. The interbank deal (between the customer’s bank and the counterparty bank) will be settled as per the current CCIL settlement process while the customer deal will be settled bilaterally between the bank and customer.
6. Once the trade is completed, a ticket showing interbank rate, mark-up and the net rate will be generated. The customer can opt for same day delivery (cash), next day deliver or spot delivery (trading+2 days or T2).
7. In case of same day delivery, the customer can visit her bank and take delivery or deposit the foreign currency, she has traded through the platform.