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http://www.managementparadise.com/article/5269/overview-of-indian-derivative-market
Category: Finance / Derivatives
Published on Wednesday 2 October, 2013
Overview of Indian Derivative Market
By Adri Mitra (M.Phil, M.Com, PGDM)
Short History of Derivatives Trading in India
Before derivatives trading began, NSE and BSE were
all-electronic equity spot markets. By international
standards, they were small markets. Derivatives
trading, which started in J une 2000, was a turning
point in many ways. And after all the changes had
fallen into place, NSE and BSE were both amongst
the top 10 exchanges in the world by the number of
transactions.
At NSE, at the outset, there was only one contract:
Nifty futures. A full set of equity derivatives
products was only available by November 2001. The
9/11 attacks on the World Trade Centre in the US
were the first important event surrounding which
index derivatives trading came to be of interest.
Starting from November 2001, the growth in the
number of contracts traded at NSE has been
remarkable: an average compounded growth of 5.1%
per month. Few derivatives exchanges worldwide
have obtained such a hectic pace of growth in the
early years after launch.
In early 2002, the market had a new technique
(options and futures) for expressing old ideas (views
on individual stocks). The idea of trading an index
was something new. Gradually, knowledge about the
index percolated within the community, and the share
of index derivatives went up to over 80% of the
overall equity derivatives trading.
There has also been a shift away from equity
derivatives. Currency derivatives trading commenced
at NSE in August 2008 with a limited form of
currency futures trading. At the time, trading was
permitted in only futures on the rupee-dollar rate,
options and swaps were banned, participations by
FIIs and NRIs was banned. Yet, currency derivatives
trading rapidly gained prominence at NSE, rising to
above 10% of the overall NSE derivatives business
within six months.
Structure of Indian Derivative Markets
Derivative trading in India takes can place either on a
separate and independent Derivative Exchange or on
a separate segment of an existing Stock Exchange.
Derivative Exchange/Segment function as a Self-
Regulatory Organization (SRO) and SEBI acts as the
oversight regulator. The clearing & settlement of all
trades on the Derivative Exchange/ Segment would
have to be through a Clearing Corporation/ House,
which is independent in governance and membership
from the Derivative Exchange/Segment.
Organisation of Indian Derivatives Markets
Various models exist for the regulation of derivative
products across the globe. In some countries, all
financial markets including those for commodity
derivatives and securities derivatives are organized
under one regulator. Certain countries keep money
market operations exclusively under Central Bank
and all the other segments of financial markets under
a separate regulator. Some countries have a very
fragmented system of regulation with separate
regulators for each class of product. In many
jurisdictions, the market for non-standardized
contracts or better known as over the counter
market or negotiated market are not under any
specific regulator INR.
Derivatives instruments in India are regulated by
the Reserve Bank of India (RBI), Securities and
Exchange Board of India (SEBI) and Forward
Markets Commission (FMC).
The framework for regulating derivative transactions
is provided in the various Acts of Government of
India such as Securities Contracts (Regulation) Act,
1956, Reserve Bank of India Act, 1934, Forward
Contracts (Regulation) Act 1952 and related Rules,
Regulations, Guidelines, Circulars etc.
Exchange traded equity derivatives market is
regulated by Securities and Exchange Board of India
(SEBI) while the Forward Markets Commission
(FMC) regulates the exchange traded commodity
derivatives market in India. Reserve Bank of India
(RBI) as well as SEBI jointly regulates the exchange
traded foreign currency and interest rate futures. The
foreign currency, interest rate and credit derivatives
traded in the over the counter (OTC) market is under
the jurisdiction of RBI and is permitted as long as at
least one of the parties in the transaction is regulated
by RBI.
To understand the size of each segment, the turnover
in various derivative contracts over the past three
years across the segments is given below. As may be
seen, the OTC turnover as a percentage of exchange
2