The Hindu Business Line : Confidence vote on futures

THE LIBERALISED FRAMEWORK announced by the Securities and Exchange Board of India should expand the `futures' and `options' segment, and result in moving much of the speculative activity from the `spot' to the `derivatives' market. The proposed changes represent a vote of confidence in the smooth functioning of the `derivatives' market on the National Stock Exchange the past four years. The significantly relaxed eligibility norms for a stock to qualify for `futures and options' could bring more scrips onto this trading platform. A market-wide position limit should ensure that the expansion of the trading list is not unbridled, but remains confined to stocks with liquidity. If the expansion enhances the depth of the market, price discovery is bound to improve.

With foreign institutional investors stepping up their activity over the past year — they now account for about 20 per cent of the derivatives trading — the four-fold rise in the limit for them should make the FIIs become more dominant players. The linkage of the `short positions' they can take through index derivatives to the value of their stock holdings is likely to provide for a comfortable level of hedging; the additional limit on the buying side may have little relevance as their debt investments are but modest. The package of measures is bound to enhance the relative attractiveness of the Indian market for the FIIs. The moves on more liberal entry norms and the higher limits for traders and the FIIs have been complemented by a substantial increase in the market-wide position limit for stock `futures and options'. This may be of relevance for the 10 stocks that dominate the derivatives segment; for the remaining 41 and would-be entrants, the higher limit may only remain a facility on paper. The decision to scrap the doubling of price and volatility ranges, if open interest reaches 80 per cent of the market-wide limit, is significant as it removes a hurdle that enhances the trading cost. This change will ensure that the pricing of futures and options contracts would be seamless, unaffected by a rising level of open interest.

The enhanced flexibility available to traders on timing of payment of mark-to-market and settlement margins dovetails with the idea of creating an environment that would drive the growth of the `derivatives' market. The decision to treat investments in units of `gilt' and `money market' mutual funds as cash equivalents for the purpose of liquid assets that trading members have to maintain was overdue as these are secure assets. Equally welcome is the inclusion of equities and units of other mutual funds as eligible securities for the purpose of liquid assets. The emergence of products linked to more indices could provide investors with hedging options that focus either on specific sectors, similar to the one now available for IT, or cover a larger universe of stocks than the narrow Nifty futures contacts that are widely traded. The package as a whole would lead to a better linkage between the spot and futures markets; this would be a beneficial and lasting impact.

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