Derivatives Issues On Sebi Meet Agenda

The board of the Securities and Exchange Board of India (Sebi), scheduled to meet on September 4, will be deciding on a number of issues related to derivatives trading.

According to the agenda laid out, the foremost item is that of introduction of stock futures which will be taken up by the regulator on a priority basis. Though initially, there had been some opposition to the introduction of stock futures, the markets watchdog has now woken up to the importance of stock futures and its usefulness in creating an efficient market.

Another item of prime importance is permitting institutions to undertake segregated short selling in the cash market which will be linked to the institution's exposure in the derivatives market. In other words, institutions can go short in the cash market in any scrip provided they have an exposure to the scrip in the derivatives market. Of course, there will be a cap on the overall exposure. This kind of short selling is expected to create an efficient price convergence between the futures and the cash market.

According to sources, however, in the initial instance, short selling may be allowed only on the uptick and not on the downtick - which is the practice in many advanced markets. In fact, according to the advisory committee on derivatives, the segregated short selling facility to institutions coupled with a good lending and borrowing mechanism would actually help in creating an efficient stock futures market.

The board is also expected to approve the recommendation made by the advisory committee that foreign institutional investors (FIIs) should be permitted to trade in all kinds of derivative contracts approved by the Sebi. At present, the Reserve Bank of India (RBI) allows foreign institutions to deal in index futures contracts only. However, after the Sebi board approves this, it has to co-ordinate with RBI in this matter. A committee might be set up to rationalise the exposures in the deivatives market which is currently linked to the exposure in the cash segment.

Introduction of a new category of clearing member will also require Sebi board approval as it is currently absent from the regulations. The role of banks in derivatives market, as a participant and in margin trading as financiers, is also expected to be discussed during the board meet, sources said.