Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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.


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