Derivatives Trading Back In Focus

The LC Gupta committee set up by the Securities and Exchange Board of India (Sebi) on regulation of derivatives trading in India is considering a variety of products to be introduced in the Indian market. Sources said that stock index futures, stock index options, and futures & options on individual stocks are being considered.

The committee is also examining the possibility of introducing interest rate futures and currency futures.

The committee will examine areas where market players take risks, and will evaluate which type of risk taking is of primary concern to market operators. Systematic risk, interest rate risk, exchange rate risk, default (credit) risk and asset-liability mismatch are the main areas which the L C Gupta committee will be examining in great detail.

 

According to sources, the committee is also considering whether derivatives may be introduced in dematerialised form through the nascent National Securities Depository Limited.

In addition, the committee is also examining the problems that may arise if there are arbitrage operations between the derivatives market and the cash market, and whether the existing clearing and settlement systems in India can handle such arbitrage operations.

Sources said that the committee will also try to find out whether the majority of market players feel handicapped because of the unavailability of index-based futures and options in India, and whether they would welcome/participate if such instruments are introduced.

Views of various market players have already been solicited by the committee regarding the role the market players would like to play once derivatives are introduced in India. The committee has asked various important market players, whether they would choose to act as hedger, dealer, speculator, broker or option writer.

The committee is also trying to assess what class of clients the market player expects to entertain if he is a dealer or broker. In a questionnaire addressed to various market players, the committee has asked which type of client would be the target group for the dealer/broker--corporates, financial institutions, NBFCs, retail investors or FIIs.

Sources said that the L C Gupta committee will also debate on the type of derivative products that will serve best in improving the efficiency of the stock market and will hold discussions on whether derivative trading is liable to spout new problems and add to stock market volatility.

The committee is in the process of working out the entry requirements in terms of net worth etc for a market player to become a broker/dealer in the derivatives market.

Important market players said that the committee has sought their opinion about the minimum contract size for trading in index futures, and what contract maturity period would interest them to trade in futures and options on stock index or individual stocks.