‘Index options will be BSE’s next derivative product’
The Bombay Stock Exchange (BSE) is endeavouring to spread the knowledge and awareness about the newly introduced derivative product. Capital Market’s Anurag Singhai spoke to Dr Manoj Vaish, deputy executive director, BSE, to know about the initiatives that BSE intends to take to nurture and develop this new emerging segment. Excerpts.
What’s your view on the current trading pattern of our futures market?
The average daily volume so far has been in the range of Rs. 6-7 cr. The daily average volume in Nov. 2000 alone has been around Rs 11 cr. Till about mid-Oct. 2000, the number of contracts traded on BSE was in the range of 200- 600 contracts per day. Since then, the numbers have increased to about 800 contracts, and we are now seeing stability around the 400 level on a daily basis. The trend noticed in the levels of open interest on the BSE is healthy. This is proof of trust in the system and more and more players are wanting to hold their positions till maturity.
Open interest breached the 500 contract level in Jul. 2000 though it reached 1000 contracts in the same month. It breached the 1000 level only in August. The open interest hovered around 500-1000 contracts till about October and then breached the 1500 level in Nov.r 2000. The annualized cost to carry on this segment has been in the range of 5 - 15 %. Increased retail and institutional participation is further expected to improve volumes on this segment.
Why are volumes not very encouraging in the derivatives segment? Why do futures markets lack institutional participation?
The derivatives market is in its nascent stages of growth and any observation/conclusion at this stage would be too premature. Coupled with that, markets are witnessing a lack of institutional and retail participation. A lot of institutions are in the process of setting up their operations and procuring internal clearances to start trading in derivatives. It has been clearly stated in the LC Gupta Committee report that mutual funds will be allowed to participate in derivatives though only for hedging purposes. Though the progress on this front has been slow, volumes are expected to pick up once participation from this category improves.
It seems issues like payment of margins, is keeping FIIs away from the futures market...
As against the cash market, FIIs have to compulsorily pay margins in the derivatives segment. (They are not exempt from margins in derivatives). Second, FIIs had a problem in remitting margins in foreign currency and RBI has issued a clarification in this regard.
What are the legal hassles in developing the Indian futures market in terms of depth and mass participation?
Accounting and taxation guidelines are not yet finalised. There is no EFT mechanism in the country for prompt payment/receipt of margins. The issue of stamp duty is yet to be clarified.
What initiatives should be taken to develop the Indian futures market?
We have introduced the concept of Limited Trading Membership (LTM) which allows non-members of the BSE to become trading members in the derivatives segment. Our initiative is to spread awareness of this concept to regional stock exchanges, especially those who have become members of BSE. This will help increase the depth in the market for derivatives throughout India.
On the training front, apart from conducting regular training programmes in derivatives at the BSE’s training institute, we have conducted a number of investor awareness seminars in Mumbai and also in about 20 centres across the country. We have also made one-to-one presentations to MFs, FIIs, banks, Indian financial institutions and broking outfits. Joint seminars with Amfi, ICAI, ICSI (various chapters) and also with educational institutes in Mumbai as well as other parts of the country have been conducted.
What’s the future of the derivatives market in the country? Do you plan to introduce more derivatives products in the coming days?
There is a lot of potential in the index futures market which is waiting to be tapped. Retail awareness of the product is increasing. Institutions are taking necessary approvals and setting up their operations desk. We foresee that threshold volumes will bring down the bid-offer spreads on the futures market and retail participation will improve with increased awareness.
We are planning to introduce more derivatives products with options on the index as the next product to be launched. With more products, various market segments will be involved and their hedging and investment needs will be catered to. Risk management becomes more effective as more and more tools become available.