Efforts to create a centralized foreign exchange market are coming to fruition. The regulator of Iran’s currency, the Central Bank of Iran, has finally agreed to the offering of foreign exchange futures on Iran Mercantile Exchange.
Forex futures contracts trade one currency for another at a specified date in future at a price specified on the purchase date. The bank had initially dismissed the idea and said the interbank market will “suffice Iran’s foreign exchange needs”.
The CBI’s position has changed. Now the bank is concerned with the starting date for the market and is insisting futures are offered when sanctions are lifted and after it adopts a unified exchange rate regime.
Iran has been under sanctions by the United Nations, the United States and the European Union over its nuclear energy program. The sanctions are expected to be lifted within six months, as Iran honors its commitments to cut back its nuclear program, in line with a historic deal struck this July.
The intensification of sanctions in 2010 led to a currency crisis that saw the rial lose 70% of its value in a short period, damaging many businesses in the process.
Since then, regulators have sought to find ways to limit fluctuations and make currency trading orderly. Also, as a result of the crisis, Iran reverted back to a multiple forex rate regime. The central bank has promised to abolish the system within six months of the lifting of sanctions.
“The CBI has agreed to the outlines of offering forex futures,” IME’s chief executive, Hassan Soltan-Nejad, said in an interview with our sister publication, the Persian weekly magazine Tejarat-e Farda.
Officials want to provide a tool to help Iranian companies and foreign investors hedge against foreign exchange risk of the rial, and to better control forex volatility.
The executive is, however, pushing to offer dollar futures sooner than later, irrespective of the unification of forex rates.
“Most of the volatility and speculative demand for foreign exchange comes from forward contracts. Transferring those trades to a standardized and transparent contract can help manage exchange rates and remove rent,” he said.
Soltan-Nejad believes they “should not wait for the adoption of a unified forex regime”, as the increasing rift between market rates and government rates puts unification out of immediate reach. T
he gap between the dollar’s official and market exchange rate has widened to 21.3% in recent weeks. It had fallen to a two-year low of around 10% in July.
The US dollar changed hands at 36,530 rials by 1105 GMT on Monday, while the central bank changed it at 30,105 rials.
The Details
Futures will be offered on the US dollar-Iranian rial pair and they will be traded round the clock, seven days a week. IME is also looking to later introduce contracts on euros, but it needs the approval of the central bank and the Securities and Exchange Organization.
Spot trading will not come for at least a year, according to Soltan-Nejad. However, options may be offered sooner, as the executive said: “Forex futures and options are complimentary. Options should also be offered to help cover risk and better forecast exchange rates.”
Volatility on the contracts is likely to be capped around the 5% mark. The cap will be set by calculating the price fluctuation range.
“If we were to offer dollar futures today, according to our calculations, a 5% range would be suitable,” said the executive.
The initial margin—money traders would have to put up to hold contracts open—will also be changed based on dollar’s average exchange rate fluctuations.
Settlement dates for the futures have remained undecided.
“Depending on liquidity of contracts at the onset, we may offer contracts for each month or just every other month,” said Soltan-Nejad.
This paper had argued in a November 11 article that IME should adopt maturity dates offered by International Monetary Market—part of the Chicago Mercantile Exchange, the largest futures exchange in the United States—namely the third Wednesday in March, June, September and December, as is conventional in currency futures around the world.
IME is using an upgraded software in the gold coin futures market for offering dollar futures.
Tehran Stock Exchange and over-the-counter market Iran Fara Bourse initially vied to offer the futures, but IME had the most experience in offering derivatives and had the required structure in place.
Founded in 2006, IME trades in agricultural, industrial and petrochemical products in the spot and futures markets. It also offers futures on gold coins, instead of bullion.
