The Reserve Bank of India [Get Quote] has announced the introduction of currency futures on eligible exchanges. A currency future is a standardised contract, traded on an exchange, to buy or sell an underlying asset (exchange rate in this case) at a certain date in future at a specified price today.

The central bank has, in principle, allowed banks and brokers as the first participants to start currency futures on eligible exchanges.

As regards companies, the RBI has clarified that corporates accessing such products should make compulsory disclosures of unhedged exposures and hedging in their annual accounts.

The companies can use such products only if they have an underlying rupee-dollar positions or trades. Foreign institutional investors and non-resident Indians will be allowed hedgers in the currency futures market once the market stabilises.

The boards of respective banks may have to be made specifically accountable for ensuring that risks taken by the bank, in currency futures markets, are properly assessed and are in proportion to the bank's ability to withstand extreme shocks.

The RBI is of the view that banks, being regulated entities, will be allowed both as trading cum clearing members of their own account and clients account and also as professional clearing members to provide liquidity in the market.

Brokers could be allowed on basis of multiple criteria like net worth, market reputation, regulatory framework, participation in the derivative segment.

Any existing exchange could be selected to roll out the product based on some basic criteria. Eligible exchanges will, however have to set up separate segments within the exchange with separate membership criteria, trading rules and a risk management framework.

A joint standing technical committee, comprising members from RBI and market regulator Securities and Exchanges Board of India, should come up with guidelines the end of May 2008.

While the Foreign Exchange Management Act - 25 will be substituted with new notification to enable trading of currency futures, the RBI continues to retain the right for stipulating participants, participant-wise position limits or any prudential limits at any point of time.

No quantitative restrictions may be imposed on residents to trade in currency futures while the product could have only rupee-dollar contract and a rupee-euro contract could be allowed after a period of six months.