The Hindu Business Line : Derivatives market to see larger volumes

THE traded volume in the derivatives market is expected to double in the next couple of years, partly because of its own momentum as also reduction in contract size and partly at the cost of the cash market.

The higher leverage facility may attract traders to derivatives after the Securities and Exchange Board of India's proposal for upfront payment system (value at risk margin) in the cash segment is introduced.

Brokers and analysts feel the current interest in the equity derivatives market has just begun and with introduction of new derivatives products, higher institutional and retail investors participation, the volume is likely to increase substantially from the current levels.

According to foreign broking firm JP Morgan "We are only just scratching the surface. We expect equity derivatives volume to at least double in the coming one to two years." It means volume may cross Rs 20,000 crore from current levels.

The proposal on upfront margins in the cash market is similar to that of derivatives; it is likely to attract investors of cash market to equity derivatives. Currently, brokers take margins from its clients on T+1 basis in the cash market, but shortly it will change and brokers have to take margin in advance (before the trade, similar to derivatives segment).

"With margining system at par in the cash and derivatives segment, investors would like to take positions in the derivatives market due to the higher leverage facility," said a dealer with a foreign broking firm. However, Mr Vineet Bhatnagar, Managing Director, Refco Sify Securities, said upfront margin in the cash market is unlikely to have any "major" impact on the derivatives segment. There was a possibility that traders might reduce their exposure in the cash market. Mr Bhatnagar felt this impact may stay for a short period only.

Ms Deena Mehta of Asit C Mehta Investment Intermediate, however, felt that as under the proposed plan, the initial margin might go up by as much as 5 to 7 times depending on the volatility of the stock, it would have an impact on liquidity in the cash market and the day traders may prefer a shift to the derivatives market.

Under the current system, brokers are expected to deposit a base capital on which an exposure of eight times is allowed. "This translates into an initial margin of 8.33 per cent," Ms Mehta, a former Vice-President of BSE, explained.

Value at risk (VaR) margin is likely to be introduced in March by the major bourse after necessary changes are made in the software for margin computation. "Considering the current volatility in certain stocks, the initial margin may go up to around 60 per cent from the present 8.33 per cent.

In the cash market, the investors, who sell, hardly pay any margin. The buyers prefer to pay the full consideration after the trade is through on the next day. Day traders, who contribute sizeably to the traded volumes in the cash market, only pay some initial margin and pay up the mark-to-market losses at the end of each trading session.

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