1st Forex ETF in Final Stages

EghtesadOnline: Regulations to establish the capital market's first foreign currency exchange-traded fund have been devised, but its launch is pending a final agreement between the Central Bank of Iran and banks, the head of the Securities and Exchange Organization announced.

News ID: ۷۸۱۱۰۳

14 January 2018

"The currency ETF's regulations have been approved by the board of directors of SEO and have even been notified," Shapour Mohammadi also told ILNA.

However, as any entity applying to establish an ETF will require a permit from the central bank and a majority of applicants are banks, "the currency fund will be established as soon as the banks reach an agreement with the central bank".

"Non-bank entities vying to form a currency ETF are not in any way prohibited from doing so," Financial Tribune quoted the official as saying.

In mid-October, the deputy head of the securities organization had heralded the establishment of the first currency ETF, saying officials with the organization have held many meetings with the central bank and agreements are being reached between SEO and CBI.

"Regulatory concerns will be addressed by the end of the week and we expect to have the official go-ahead for setting up the ETF," Ali Saeedi had promised at the time.

Currency ETFs invest in a single currency or a basket of currencies with the aim of replicating movements in the foreign exchange market by holding currencies either directly or through currency-denominated short-term debt instruments. They are widely used by investors who wish to gain exposure to the foreign exchange market and prefer not to enter the futures or forex market.

The SEO chief assured that the establishment of currency ETFs in the Iranian capital market will have a positive impact, but noted that "the funds take up a small percentage of the forex market as their volume is lower than 1 trillion rials ($23.9 million)".

With the growing popularity of ETFs around the world, investors have found it to be easy and relatively inexpensive to employ them with the goal of taking advantage of fluctuations between currencies. The funds can be purchased to track most international currencies, including the US and Canadian dollars, the euro, British pound and Japanese yen.

The launch of a currency ETF is also hoped to help curb speculative activities in the forex market that has traditionally been a hotbed for dealers eager to capitalize on market volatility.

Iran currently uses two exchange rates: the free market rate, which stood at 41,790 rials to the US dollar on Monday, and an official exchange rate for state transactions fixed by CBI at 35,958 rials.

CBI has made it a known target to unify the two rates but has so far fallen short of doing so.

Investor Caution

In early June, the Iranian capital market had its very first exchange-traded commodity when it witnessed the underwriting of its first investment fund with Bahar Azadi gold coin as its underlying asset.

A senior official at Tehran Chamber of Commerce, Industries, Mines and Agriculture announced in August that a futures currency market aimed at unifying the dual foreign exchange rates will be established in the current fiscal year to March 2018.

As Seyyed Hossein Salimi noted at the time, regulations and provisions for offering foreign currency in the capital market were projected to be enforced last year, but were postponed to the current year as a matter of caution.

After his remarks about the establishment of the first currency ETF, Mohammadi also referred to resumption of trade for shares halted on the stock market, saying shareholders must now employ analytical power more than ever and advised them to turn to experts in the field.

"Small shareholders can use the services of expert financial advisors and the important thing is that they increasingly invest in shares that boast the highest transparency," the SEO chief added.

In conclusion, Mohammadi said it must be accepted as a fundamental value that if the clarity of information of a company active in the capital market is doubtful, "we must not limit the legal rights of the shareholders and those applying to enter the capital market in order to trade the shares of the company".