NISM Series I Currency Derivatives – Chapter 5: Trading in Currency Futures
Welcome to Part 5 of our NISM Series I Currency Derivatives short notes series on PassNISM.in. This chapter covers the operational mechanics of currency futures trading — the entities involved, different types of orders, and the price circuit filter system. These are heavily tested in the exam with straightforward definition-based questions.
Missed Part 4? Read it here: Chapter 4 – Strategies Using Currency Futures.
Currency Pairs Currently Available for Trading
On SEBI-recognized stock exchanges in India, currency futures are currently available on:
INR-Based Currency Pairs (4 pairs)
- USDINR
- EURINR
- GBPINR
- JPYINR
Cross-Currency Pairs (3 pairs)
- EURUSD
- GBPUSD
- USDJPY
Pricing Rules
- On the first day of a new contract's life, the base price is the theoretical futures price (derived using interest rate parity)
- On subsequent trading days, the base price is the daily settlement price of the previous trading day
- The closing price for any contract is the last 30-minute weighted average price (VWAP) of that contract
- The tenor of a contract = the full period from launch to expiry during which it is available for trading (also called the contract's "cycle")
Entities in the Currency Futures Trading System
Understanding who can participate and what role each entity plays is essential for the NISM Series I exam.
Trading Members (TM)
Trading Members are registered members of an authorized exchange. They may trade:
- On their own account (proprietary trading)
- On behalf of their clients
Each Trading Member receives a unique Trading Member ID from the exchange. Each individual user (dealer) at a Trading Member firm must also be separately registered and receives a unique User ID. All orders and trades are tracked using these IDs.
Clearing Members (CM)
Clearing Members are registered with the Clearing Corporation. Their responsibilities include:
- Risk management for all trades they clear
- Confirmation and inquiry of participant trades through the system
- Ensuring settlement obligations are met
Trading-cum-Clearing Member (TCM)
A TCM holds combined rights — they can both trade on the exchange (as a TM) and clear and settle trades (as a CM). A TCM can handle settlement for their own trades as well as for the trades of other Trading Members.
Professional Clearing Members (PCM)
A PCM is a clearing member who is not a trading member — they do not trade on the exchange themselves. PCMs are typically large institutions such as banks and custodians. They provide clearing and settlement services to Trading Members and Participants. PCMs are not authorized to trade on the exchange on their own behalf.
Participants
A Participant is a client of a Trading Member — typically large financial institutions such as mutual funds, insurance companies, or foreign institutional investors. Key features:
- They may trade through multiple Trading Members simultaneously
- However, they settle through a single Clearing Member
Exam Tip — Quick Recall:
Trading Member = Can trade only
Clearing Member = Can clear/settle only
TCM (Trading-cum-Clearing) = Can both trade AND clear/settle
PCM (Professional Clearing) = Clears/settles for others but CANNOT trade
Participant = Client of a TM; may use multiple TMs but settles through one CM
Types of Orders in Currency Futures Trading
The NISM exam tests order types clearly. There are three categories:
A. Time Conditions
Day Order: Valid only for the trading day on which it is entered. If not executed by the end of the day, it is automatically cancelled from the system.
Immediate or Cancel (IOC): This order is sent to the exchange immediately. Whatever portion of the order can be matched right away is executed. Any unmatched portion is immediately cancelled — there is no waiting.
B. Price Conditions
Market Price Order: No specific price is specified. The system matches the order with the best available price in the order book at the time of entry.
- Buy order at market price → matched with the lowest available ask in the order book
- Sell order at market price → matched with the highest available bid in the order book
Limit Price Order: The trader specifies a price. A buy limit order will only execute at or below the specified limit price. A sell limit order will only execute at or above the specified limit price. If no matching order exists at the specified price, the order remains in the book.
Stop Loss Order: This order stays dormant until the market price reaches or crosses a preset trigger price. Once triggered, it enters the order book as a market or limit order. Used to limit losses on an existing open position.
C. Other Conditions
Pro Order: The order is entered by a Trading Member trading on their own account (proprietary trades).
Cli Order: The order is entered by a Trading Member on behalf of a client. All client orders must be tagged as "Cli."
| Order Type | Category | Key Feature |
|---|---|---|
| Day Order | Time Condition | Valid only for the current trading day |
| IOC (Immediate or Cancel) | Time Condition | Execute immediately or cancel; no partial-fill waiting |
| Market Price | Price Condition | No price specified; executes at best available market price |
| Limit Price | Price Condition | Execute only at or better than specified price |
| Stop Loss | Price Condition | Triggers only when market reaches specified threshold price |
| Pro | Other Condition | Proprietary order — Trading Member's own account |
| Cli | Other Condition | Client order — entered on behalf of a client |
Price Limit Circuit Filter
SEBI requires all recognized stock exchanges to implement Dynamic Price Bands to prevent extreme price movements that could be caused by erroneous orders, manipulation, or sudden market shocks. These bands apply to all currency futures including cross currency contracts.
| Contract Tenure | Dynamic Price Band |
|---|---|
| Up to 6 months | ±3% of the theoretical price or previous day's closing price (whichever is applicable) |
| Greater than 6 months | ±5% of the theoretical price or previous day's closing price (whichever is applicable) |
If a market-wide trend causes prices to consistently move toward the band limit, the exchanges can relax the price bands — but only in increments of 1% at a time, after observing the market-wide direction.
Exam Tip: The key numbers to remember: up to 6 months = ±3%, more than 6 months = ±5%, and bands expand in 1% increments when a market-wide trend is observed. Quick Revision: Must-Know Points for the Exam
- 4 INR pairs + 3 cross currency pairs currently traded on Indian exchanges
- First day base price = theoretical futures price; subsequent days = previous day's settlement price
- Closing price = last 30-minute VWAP of the contract
- Trading Member: trades on own or client account; receives unique TM ID
- Clearing Member: handles risk management and settlement; does not necessarily trade
- TCM: has both trading and clearing rights
- PCM: clears and settles for others but CANNOT trade on exchange
- Participant: client of TM; trades through multiple TMs; settles through ONE CM
- Day Order: valid for that day only
- IOC: execute immediately or cancel remainder; no partial-fill waiting
- Stop Loss: stays dormant until a trigger price is hit
- Pro = proprietary order (own account); Cli = client order
- Circuit filter: ≤6 months = ±3%; >6 months = ±5%; expanded in 1% increments
Internal Links
- Chapter 4: Strategies Using Currency Futures
- Chapter 6: Clearing, Settlement and Risk Management
- Take a Free NISM Series I Mock Test
- Download NISM Series I Study Material
- All NISM Certification Courses
This is Part 5 of our 7-part NISM Series I Currency Derivatives Short Notes series on PassNISM.in. Continue to Part 6 on clearing, settlement, risk management, and currency options.