Sebi mulls new mechanism for surveillance of debt instruments

The markets watchdog also plans to undertake a review of 'derivative alerts' to safeguard marketplace and investors

In the wake of growing interest in debt market, capital markets regulator Sebi is considering putting in place a new mechanism for surveillance of debt instruments traded on the stock exchanges.

Besides, the markets watchdog also plans to undertake a review of 'derivative alerts' to safeguard the marketplace and investors from any manipulative activities.

According to a senior official, the Securities and Exchange Board of India (Sebi) has also asked the stock exchanges to issue an advisory on their websites for investors in respect of trading in equity derivatives.

While trading volumes in derivatives market are much higher, this segment is mostly dominated by the institutional investors who typically have a greater risk appetite.

However, a growth in the market is also attracting other investors and there is also a growing risk of manipulative activities in this segment, prompting the regulator to put in place necessary checks and balances, the official said.

The Integrated Surveillance Department of Sebi is therefore considering putting in place a new mechanism for surveillance of debt instruments and conduct a review of the derivative market alerts.

Besides, this Department has already taken necessary action for ensuring an advisory on the exchange websites for investors in respect of trading in equity derivatives.

As per the latest data, the top five members, as also investors, of a stock exchange command a much higher share of overall turnover in the equity derivative market, as against the same in the cash market.

In the cash market, trading typically takes place in equity shares of a listed company, while the trades are conducted in futures and options contracts of an underlying equity or other security in the derivative market.

As per a Sebi advisory for investors, they should not trade in a derivative product without knowing the risk and rewards and they should be aware of the risk associated with the positions taken in the market and margin calls on them.

The investors should also collect or pay mark-to-market margins on futures position on a daily basis.

A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks or stock market indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps.

Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for a future delivery at an agreed price. There is an agreement to buy or sell a specified quantity in a designated future month at a price agreed upon by the buyer and seller.

On the other hand, a forward contract is a customised contract between two parties, where settlement takes place on a specific date in future at a price agreed today.

These are bilateral contracts, traded over the counter, and hence exposed to counter-party risk and the contract price is generally not available in public domain.