Long-term derivatives may make debut
Having imposed restrictions on fresh investments, govt is now working with SEBI to identify new instruments to attract investors. Why are stock markets volatile?
By Deepshikha Sikarwar, TNN |
NEW DELHI: Long-term derivative products may soon make a debut in the Indian capital markets. Having imposed restrictions on fresh investments through participatory notes (PNs), the government is now working with market regulator SEBI to identify new instruments like long-term derivatives to attract investors through the regulated route.
This is being done mainly to discourage complex derivatives of nine months and above being traded outside the country by foreign investors through PN route. SEBI’s actions on Wednesday were aimed primarily at preventing exotic derivatives based on Nifty and blue chip Indian stocks being traded through the PN route. Such derivatives don’t exist in the Indian market. The idea is to bring all such transactions within Indian jurisdiction, benefiting Indian players and improving tax revenues.
Derivatives are essentially financial instruments whose value is derived from the value of the underlying asset. A futures contract gives the holder the obligation to buy or sell and options contract on the other hand gives the holder the right, but not the obligation. In other words, the owner of an options contract may or may not exercise the contract.
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The government and SEBI are in discussion for introduction of such products on the stock exchanges. The move is aimed at broad-basing the instruments available to attract quality investment, a source told ET. The view within the government and the regulator is that a large number of foreign investors which are eligible to invest directly are keen on such products. The regulator has already begun registering some of them like hedge funds.
At present, the duration of derivative products both index and stocks is three months. Long-term derivative products with a duration of up to one year are quite popular overseas. It is, however, not known as to what duration products were the regulator and government looking at. The high-powered expert committee on making Mumbai an international finance centre has also made a recommendation in this regard.
The committee in its report has emphasised on establishing nexus between bond market, currency market and derivatives market. It had recommended widening range of contracts to cover currencies and over-the-counter trading of exotic and tailor made derivatives.
The premier derivatives exchange in US, the CME Group, which represents a merger of the erstwhile CMR and CBOT, has a daily turnover of $4.4 trillion. In comparison to that the premier exchange where derivatives in India are traded, NSE, is well below 5% of this amount ($220 billion a day).
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