Does NSE have circuit breakers for currencies?
Such type of scenarios happens whenever Banks want to devaluate or revaluate the currencies. In my knowledge, there is one such instance when a currency fell more than 20% in a single day wiping out most of the brokers and traders. It was in 2015 when the Swiss National Bank decided to remove Peg from EURCHF pair(1.22), and there was a flash crash within a matter of time. I have not found any exchange or broker putting a circuit breaker to halt trading in currencies falling like bowling pins. This article tries to understand from Indian market perspective only.
Basics of Circuit
A circuit is hit in either direction (upward or downward) when any financial asset moves 10% up or more. Accordingly, there are an upper circuit or lower circuit. Some exchanges keep it as 15% for some assets.
Usually, as a thumb rule, almost all the exchanges across the globe halts trading in particular financial asset due to its hitting of circuit either downward or upward. Trading resumes after a certain period when the volatility in that asset has cooled off. Indian exchanges halt trading in a phased manner for market wide indices, as shown in the image below.
image source: NSE India
Usually, it is quite easy to halt trading in assets which are traded only in one exchange or exchanges within the country, for example, stocks and indices. But what happens to the financial assets which are trading globally and 24X7 markets?
This trading curb is even applicable in some of the commodities traded globally. Some of the commodity exchanges across the globe, which creates commodity pricing and markets put a trading curb on the trading of commodities. Indian commodity exchange MCX follows in the footstep of Chicago Mercantile Board and applies all the rules in case of commodities. For example, upper/lower circuit in case of crude oil is 4%.
Coming to currencies so far what I have understood from my personal experience is that there is no such rule applicable in Indian market or any market across the globe. I tried to do some research on the same and figured that currencies are the only assets which can have free fall or windfall of 10% or more. In my knowledge, one such incident happened when EUR/CHF crashed more than 20% in 2015.
Usually, Respective Central Banks buy or sell foreign currencies to ease out liquidity, volatility whenever the home currency shows surge or downfall of more than 1%. RBI does that job in India whenever the INR depreciates more than 1% in a single day it sells dollar to ease out market liquidity and volatility. Likewise, it will buy a dollar whenever Rupee strengthens more than 1%. These measures keep a check on the currency movement for the particular day. Thus NSE is not required to put a circuit on CDS.
But let us assume even after RBI action what would happen if any of the currency in the USDINR appreciates or depreciates more than 10% in a single day? It will bring chaos to not only the market but also the economy and can have a very severe impact on the coming days. RBI can provide measures to ease out volatility but can not control the appreciation or depreciation for a much longer time on a single day. In the event of Pandemic or war-like situation, economic packages and RBI’s action cannot control the movement. These are though hypothetical cases as India’s economy is big and the currency is stable.
Also even if we assume that NSE halts trading in CDS then also they won’t be able to control the Rupee downfall or appreciation in other exchanges where Rupee is actively traded such as Dubai Exchange.
Its a 24-hour market and Rupee is being traded across the globe in several forms be it spot, futures or options. So any currency can appreciate or decline more than 10% in a single day, but trading would continue.
Any information, comments, suggestions or corrections are welcome.
