Experts call for product innovation in F&O space

The derivatives market in India may be registering significant volumes in the last few years, but experts are of the view that a lot needs to be done in terms of product innovation and removal of regulatory roadblocks.

Industry participants say the depth of derivatives — equity and currency futures & options, interest rate futures (IRFs) — segment can be further enhanced if new products are allowed along with allowing newer players. Also, regulatory restrictions on product designing need to be relaxed, they say.

“There is a great scope for further deepening of the (derivative) market and liquidity,” said R Sundararaman, senior vice-president, National Stock Exchange (NSE). “For instance, volatility is a concern area and one needs a product to hedge against it. Very soon we will have derivatives on volatility,” he added while speaking at the FIA Asia Futures Conference India.

Sundaraman further said allowing domestic financial institutions in derivative segment for hedging purposes “will be welcome for a vibrant market”.

In a similar context, Sayee Srinivasan, head, product strategy, Bombay Stock Exchange was of the view that ends could be achieved by tweaking the existing products. “The focus is to get more new products or tweak the contract design,” he said while highlighting derivative regulations need to be revisited. No one has bothered to change the tick size of the contract for so many years since derivatives started trading in India, he explained. Stock exchanges, incidentally, are already working with the regulators on this issue.

“We are working closely with regulators and other market participants to re-look at laws that are in place for so many years,” said Srinivasan. The focus is first on scaling up and then on issues which need to be done, he added.

“Restrictions on design of newer products (are) making them impractical to trade in,” said Anil Bagri, former president of ANMI, the umbrella body of stock brokers. Trading in more instruments will increase the depth of the markets, he added.

According to Srinivasan, the derivative market is facing inefficiencies since the regulations do not allow netting of delivery obligations and also a robust stock lending and borrowing (SLB)mechanism is missing. Experts also touched upon the issue of the market making that has, more often than not, been shrouded in controversy in India.

“Regulators and exchanges need to show more openness towards market making,” said Vineet Bhatnagar, managing director, MF Global India. Market making should be permitted whenever liquidity is required for new products, he added. “At CME, one can’t launch a product without market making. Here the belief is that there will be natural market for every new product,” said Srinivasan.