The United Stock Exchange is the latest entrant in the currency derivative segment. This exchange is currently trying to find its feet in a highly competitive environment. Mr T.S. Narayanasami, MD and CEO, with inputs from Mr Saurav Arora, President, Marketing & Business Development, talks about the challenges ahead for this exchange. Excerpts from the interview:
On NSE the traders on equity derivatives have moved to currency derivatives, on MCX-SX it is the existing commodity traders. Where do you see liquidity for your exchange coming from?
Liquidity begets liquidity. When there is liquidity and depth, it is easier to get a counter-party. If there is no counter-part, you put in a trade and wait. When it does not go through, you reduce the price. Secondly, instead of 1,000 lots I put in 100 lots. That will by itself bring down volumes.
We started with almost 300 registered members. Many of these members are used to trading on other exchanges. We are trying to make more number of members trade through us. If that happens, we will have sustained volumes.
Our focus is now on activating all our members. We are working with each member one-on-one. We are doing workshops with retail clients. We are engaging with the people in the office. It is to a large extent relationship management.
You started with a flourish in the first month and then volumes have been coming down steadily. Why could you not keep up the tempo and take it forward from there?
We are now trying to grow more gradually. You see growth should be sustainable. If one day three or four large traders give me volumes and next day they vanish, it is not going to take me anywhere. If I have 100 members who are active then my dream is fulfilled. We are going towards that.
In the country as a whole there may be 1,500 trading members, trading in stocks or stock derivatives or currency. My guess is that only 100 or 150 trading members will be trading in currency. Despite only 10 per cent members trading in currency, volumes are quite sizeable.
Currency touches everybody. Each corporate house, importer and exporter will track currency whether they are active in stocks or not. We have to now bring them on the exchanges since price discovery is best on the exchanges. OTC price is a rough estimate. You check through six or seven banks and that is the OTC rate. These companies are yet to start trading on exchanges due to lack of awareness.
Many of the banks who are shareholders of USE are also holding stakes in NSE or MCX-SX. Why do you think they would shift their trading activity to USE?
We are the last entrant. But the fact remains that this is an exchange for the system, promoted by the system. It all depends on how you canvass, what kind of proximity you ensure with your stakeholders. Few of them are shareholders on NSE and other on MCX-SX. But that per se is not the contributing factor to the volumes on these exchanges.
All the 21 banks are with us, even State Bank of India. State Bank is yet to start trading because of some formalities. That can happen any time. We are bringing them to the table, fulfil all formalities. Let them begin gradually.
The current volumes that we have, it took the other exchanges relatively longer to get to this level. After four month of commencing operations, other exchanges had volumes of Rs 800 or Rs 900 crore. In three-and-half months we have 8 per cent market share and turnover of Rs 1,500 – 1,600 crore. That is a consolation or comfort to me.
Don't you think that the contract size being restricted to $1,000 is a drawback and restrains large importers?
It does not make a difference. Instead of buying onelot they have to buy 1,000 lots. As long as they are able to execute large orders on the exchange it is alright. Right now companies are doing transactions up to $2-4 million. RBI has recently come out with a circular that from February 1 companies with less than Rs 1,000 crore export turnover and Rs 200 crore net worth can not participate in the OTC market. Such companies wanting to access the OTC will now have to come to exchanges.
What is your revenue model now since you are not charging any transaction cost and neither are you collecting membership fee?
There are two ways of looking at it. Someone can show volumes and say that after three years volumes will be so much and they will be the most sought after exchange. There will be a value for that. They can say I have so many members, put a value and cash in on that. The other aspect is the bottom-line and that is the right way to go about valuing an exchange.
We are not charging transaction cost now because the matter is now sub judice. The competitive commission has to come up with a judgment. Secondly my volumes have to increase. If I start charging transaction fee when there are no volumes then even the existing traders will move away. If I have good liquidity and depth, I can even charge 1 per cent more than the others.
Do you think that the fact that the currency derivative contracts are settled in cash and not in foreign currency is a drawback since importers and exporters will have to go to the OTC market eventually while making payment?
It is cash settled right now. But the disadvantage of OTC market is that every time you try to hedge, the spreads are so high, at 3 paisa or 5 paisa. That gets offset in the exchange traded currency derivative market. If you have hedged an export contract at 45 and you see the rupee moving adversely you can cancel the contract easily and re-enter later. If you buy the same contract on the OTC market you can not cancel it that easily.
There appears to be stagnation in currency futures volume over the last couple of months. Your comment.
If you see the volumes over the last two years, there were days when the volumes exceeded Rs 50,000 crore. There is potential and there is a need. Less than 5 per cent of the participants are actual users. The others are all there because there is opportunity to trade, because you do not need an underlying asset. There could be jobbers. That is the reason why volumes fluctuate.
There are days when volume might not have been significant but there could have been a variety of reasons for that. If you take the year-end for instance, there is less trading because people leave early.
The volumes are building up. It is already far higher than cash portion of stocks. From zero we have reached this level. There is potential to catch up with equity derivatives too.