Currency Futures

Exchange-Traded Currency Futures Vs over the Counter (OTC) Forex

Published

10 years ago

November 8, 2014

Piper

Off late, Indian financial markets have caught the attention of large populace of NRIs (Non Resident Indians) and international business media. Government of India has initiated some excellent steps in the direction of fiscal reforms. Introduction of Exchange-Traded Currency Futures in India is considered as the most vital step in the modernisation of financial markets. SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India) are two major regulatory authorities behind the legal framework of currency futures trading in India.

NSE (National Stock Exchange of India) was the first recognised exchange to launch currency futures trading from 29^thAugust 2008. Although currency futures trading in India has just begun but as indicated by SEBI Chairman, the markets would mature in due course and then after the government would consider introducing more number of currency pairs and innovative financial products. Government is also contemplating to permit Foreign Institutions and NRIs to participate in currency futures in India. Economists strongly believe that future for currency market in India is bright. Most of the forex participants also consent that expected growth in currency futures in India would be tremendous if the government continues with the essential reforms in currency markets.

For any person or NRI who is affected by currency fluctuations, it is essential to understand what is better – cash forex or currency futures. Currency future trading has its positives and negatives. Likewise, foreign exchange trading also has its advantages and disadvantages.

As a potential investor, wishing to benefit from currency fluctuations or looking to hedge currency risks you may have to take well-informed and unbiased decisions with respect to futures trading over Over the Counter forex trading. It is prudent to understand how cash forex and currency future differ from each other in the global forex markets. An Indian investor might find INR currency futures as more advantageous but it may not be so for other investors.

Here’s a table that compares Exchange-Traded Currency Futures Vs over the Counter (OTC) Forex in respect of few important parameters. The comparison takes into acount global markets rather than restricting it only to Indian markets.

Parameter	Exchange-Traded Currency Futures	OTC (Over the Counter) Forex or Cash Forex
Market Timing	Fixed timing during the day as decided by the exchange	24 hours
Liquidity	Poor as the participants from a particular country only are interested or allowed	Very High as millions of traders from all over the world can trade simultaneously irrespective of time zones
Choice of Currency Pair	Limited to about half a zozen most active currency pairs	Very large as the whole world participates
Daily Trading Volume	Very Low	Very High
Regulatory Framework	Excellent	Average
Transaction Costs like brokerage charges and statutory duties and taxes	Low	Nil
Broker’s commission in the form of Spread (called as Pips in the global forex lingo)	Nil	It does exist and varies with the Forex Broker
Risks of counter-party defaults	Nil as the performance guarantee is provided by the clearing corporations.	It does exist
Margins	Low	Low
Leverage	Average	High
Mark to Market margins	Daily	Not applicable
Contract Size	Small	Large
Risks to loss of capital	Average	More than average
Growth rate of the markets	Grows at the rate of about 23% every year	Grows at the rate of about 10% every year
Geographical Reach	Restricted to a specific country	Spread all over the world
Share of total forex market	Around 8%	Around 92%