Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation. This blog is currently suspended.

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Thu, 02 Nov 2006

US CFTC Policy on Foreign Exchanges: Lessons for India

The US Commodities and Futures Trading Commission (CFTC) has issued a statement of policy regarding foreign exchanges offering their products in the United States. This issue had become controversial in the context of the UK based ICE Futures trading US energy contracts in the US that I blogged about here.

The CFTC has decided to maintain the existing policy framework of exempting exchanges like ICE from US regulation. In particular, the CFTC states that:

  1. the trading volume originating in the US is not determinative of US location
  2. the fact that the contract is based on a US produced or economically important commodity is not probative of location

These put to rest the two critical arguments that were raised against ICE Futures.

I think the CFTC has shown the way for regulators in India to allow foreign exchanges to offer their contracts directly in India through electronic trading platforms. The RBI now allows Indian citizens to remit up to $50,000 a year outside India for investment purposes. What better thing can we give these investors than the ability to buy foreign stocks or bonds or derivatives sitting in front of their computer screens in India? We must not let protectionist arguments prevail in denying Indian residents the best investment opportunities in the world and force them to park their money in foreign bank deposits.

What is more, acceptance of the CFTC principles would allow foreign exchanges to offer trading in India on ADRs of Indian companies provided the Indian investor pays for them in dollars. This would produce better price discovery in the ADR market and reduce the price gap between the Indian and offshore markets.

Posted at 13:29 on Thu, 02 Nov 2006     View/Post Comments (0)     permanent link