BSE slashes fees in FX derivatives battle with NSE

Mumbai:  India's oldest stock market operator, BSE Ltd, is slashing fees to gain ground in new markets, turning currency derivatives into the latest battleground in its long-standing rivalry with the younger but larger National Stock Exchange. BSE said the derivatives move was part of a strategy that accepted sacrificing potential profit margins to build volume, as it aims to become a more dominant player beyond bread-and-butter equities trading.

"BSE did not have a habit of being successful," said BSE chief executive Ashishkumar Chauhan in an interview. "In the past few years we have had significant traction in new areas." Since opening its currency derivatives platform in November 2013, roughly 5 years behind its rival, the bourse formerly known as Bombay Stock Exchange has garnered 45 per cent of the market share versus the NSE's 49 per cent.

The lowered fees are providing an unexpected boon for currency investors, given the NSE has responded with discounts that can reach up to 50 per cent, depending on certain criteria. Increased competition could spur development of a market in keeping with the desire of the RBI, which is keen to encourage the small and medium-sized companies to hedge their currency exposure.

BSE muscled into currency derivatives markets after signing a deal in 2013 with Deutsche Boerse to its trading platform by paying a fraction of the trading fees generated.

Outsourcing the trading platform has allowed the BSE to slash fees. The exchange charged nothing for about a year, but started to charge 2 rupees (roughly 3 U.S. cents) per 10 million rupees worth of trades last month. It plans to raise it gradually to 10 rupees by late this year, still only a fraction of the 110 rupees charged by the NSE. Chauhan said the BSE would be "very profitable" at these levels, saying his break-even cost is 4 rupees.

"When you start profiteering you end up losing your role, or compromising on your role as a public utility and as a front-line regulator," he said. An NSE spokesman said price was not the only concern for traders, or the exchange, adding "liquidity in NSE across segments ensures less impact cost and easy exit for trades."

Brokers, certainly, hope lower trading fees will drive up trading volumes in currency derivatives at exchanges, which average around $1.1 billion a day -  well below the $7 billion traded in the over-the-counter markets preferred by large firms.

"The currency derivatives market is still in its infancy in India. Competition is good," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.

"BSE needs to attract liquidity and more participants. Without liquidity, people won't risk their positions for lower transaction costs."