Market players back Sebi's derivative products proposal

The Securities and Exchange Board of India’s (Sebi’s) proposal to introduce a host of exotic derivative products in Indian markets has got a positive response from market participants.

A senior Sebi official said the report, which sought public comments till April 6, has received 37 responses, most of which look forward to the launch of exotic derivative instruments.

“Though different players favoured different products, the overall response reflected that market participants were awaiting the introduction of these products at the earliest,” said the Sebi official.
 

NEW PRODUCT WISH LIST

Options on currency, energy, interest rate futures, derivatives based on bond indices, exchange-traded cross-currency F&O, credit derivatives based on insurance against credit risk, over-the-counter (OTC) currency, forward rate swaps and exchange-traded third-party structured products (calls and structured warrants)

WEAPONS OF MASS DESTRUCTION

While these products are often referred to as the "financial weapons of mass destruction" in some countries, market players felt that the risk management systems in India were capable of handling these products, at least the less complex ones

Given the good response, the Sebi official said, the market regulator might give its nod for the first set of such products in the next three-four months.

On March 20, the Rammohan Rao-headed Derivatives and New Products Committee had released a report suggesting a gamut of new variants in the futures and options (F&O) segment. These suggestions were made in an effort to improve liquidity in the market and enable market participants to hedge their exposure to the forex market volatility.

Market participants are of the view that the norms governing transactions in these products should be formulated in such a way that there is no room for manipulation in settlement of contracts. The margining system would also need to be toned up, they said.

While these products are often referred to as the “financial weapons of mass destruction” in some countries, market players felt that the risk management systems in India were capable of handling these products, at least the less complex ones.

“Products such as single stock-based or sectoral index-based mini contracts, longer tenure options and volatility index-based F&O are simpler to understand and will be easily absorbed by Indian investors. These products will attract retail and foreign investors’ participation in Indian derivatives market,” said the head of research at a domestic securities firm.

The committee had suggested that products such as options on currency, energy, interest rate futures, derivatives based on bond indices, exchange-traded cross-currency F&O, credit derivatives based on insurance against credit risk, over-the-counter (OTC) currency, forward rate swaps and exchange-traded third-party structured products like calls and structured warrants should be allowed.

“As most of these products are equity-linked and exchange-traded, risk management would not be a problem,” said a market source.