Currently, self-contained primary dealers (SPDs) are permitted to engage in foreign currency trading for limited purposes.
“In order to enhance the role of DPS as market makers, on a par with banks engaged in primary dealer activities, it is proposed to allow DPS to offer all currently permitted foreign exchange market making facilities to licensed Class I brokers, subject to prudential guidelines,” RBI said in the development and regulatory statement.
The move, according to the RBI, would give forex clients a wider range of market makers in managing their currency risk, thereby expanding the forex market in India. A broader market presence would improve the ability of DPS to provide support for primary issuance activities and in the secondary market for government securities, which would remain the core business of primary dealers.
There are seven stand-alone Master Distributors (SPDs), including Goldman Sachs,
PD, Nomura, Morgan Stanley, GILT, DHFI and STCI. “This move will likely strengthen the role of SPDs in market making in the foreign exchange market and in the OIS foreign exchange market,” said Shailendra Jhingan, Managing Director of ICICI Securities Primary Dealership. “Offshore OIS markets have significantly higher volumes than the domestic market.”
“This move will contribute to greater integration of domestic and offshore markets and improve overall liquidity in both markets, allowing clients to better hedge their interest rate risk,” he said.
Indian banks were permitted in February this year to transact in the offshore Foreign Currency Overnight Index Swap (FCS-OIS) market with non-residents and other market makers with a view to suppressing segmentation between onshore and offshore OIS markets and improve the efficiency of price discovery.
“This will provide greater flexibility to serve overseas portfolio investors,” said Vijay Sharma, head of trading at PNB GILT. “We can help them hedge their interest rate and currency risk by offering a full range of services. This is also likely to add liquidity to market making,” he said.
“It also provides another income venue for PDs, which leads to diversification of income sources,” he said.
Overnight index swap contracts (OIS) based on the Mumbai Interbank Outright Rate (MIBOR) are the most widely used interest rate derivatives (IRD) in the onshore market.
The use of MIBOR-based derivative contracts has increased with the steps taken by the Reserve Bank to diversify the participant base and facilitate the introduction of new IRD instruments.
Internationally, there has been a shift to alternative benchmark rates with broader participant bases (beyond banks) and higher liquidity.
“Amidst these developments, it is proposed to establish a committee to undertake a thorough review of the issues, including the need for a transition to an alternate benchmark, and suggest the most appropriate path,” RBI said.