Development of Derivative Markets in India

Derivatives markets have been in existence in India in some form or other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s India had one of the world’s largest futures industry. In 1952 the government banned cash settlement and options trading and derivatives trading shifted to informal forwards markets. In recent years, government policy has changed, allowing for an increased role for market-based pricing and less suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the early 2000s, and national electronic commodity exchanges were created.
In the equity markets, a system of trading called “badla” involving some elements of forwards trading had been in existence for decades. However, the system led to a number of undesirable practices and it was prohibited off and on till the Securities and Exchange Board of India (SEBI) banned it for good in 2001. A series of reforms of the stock market between 1993 and 1996 paved the way for the development of exchange-traded equity derivatives markets in India. In 1993, the government created the NSE in collaboration with state-owned financial institutions. NSE improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system and real-time price dissemination. In 1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal to SEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction of derivative products, and bi-level regulation (i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role). Another report, by the J. R. Varma Committee in 1998, worked out various operational details such as the margining systems. In 1999, the Securities Contracts (Regulation) Act of 1956, or SC(R)A, was amended so that derivatives could be declared “securities.” This allowed the regulatory framework for trading securities to be extended to derivatives. The Act considers derivatives to be legal and valid, but only if they are traded on exchanges. Finally, a 30-year ban on forward trading was also lifted in 1999.
The economic liberalization of the early nineties facilitated the introduction of derivatives based on interest rates and foreign exchange. A system of market-determined exchange rates was adopted by India in March 1993. In August 1994, the rupee was made fully convertible on current account. These reforms allowed increased integration between domestic and international markets, and created a need to manage currency risk. The easing of various restrictions on the free movement of interest rates resulted in the need to manage interest rate risk.
Derivatives Instruments Traded in India
In the exchange-traded market, the biggest success story has been derivatives on equity products. Index futures were introduced in June 2000, followed by index options in June 2001, and options and futures on individual securities in July 2001 and November 2001, respectively.
Derivatives on stock indexes and individual stocks have grown rapidly since inception. In particular, single stock futures have become equally popular to the index futures. In fact, NSE has the highest volume (i.e. number of contracts traded) in the single stock futures globally, enabling it to highest rank holder among world exchanges at point of time. While single stock options were less popular than stock futures, they have witnessed a high growth rate since starting of 2011 after they were changed to European style. On the other hand, index options are hugely popular than index futures. Now a days, index options turnover share the 2/3rd of the total F&O turnover. NSE launched interest rate futures in 2009 on 10 Year Notional Coupon-bearing Govt. of India Security & the recently introduced (2011) 91-day Govt. of India T-Bill; but in contrast to equity derivatives, there has been little trading in them. This particular segment is still in its nascent stage.
Regulators permitted the exchanges to launch currency derivatives contracts to start with USDINR currency pair in 2nd half of 2008. Later on three more currency pairs EURINR, GBPINR & JPYINR is allowed in Feb. 2010. Currency options contracts were launched on Oct. 29th 2010 on USDINR only & so far now this is the only option contract available in the segment. Since its launch forex derivatives have seen continuous activity & rising trading volumes than interest rate derivatives and any other segments.
Exchange-traded commodity derivatives have been allowed for trading only since April 2003. The number of commodities eligible for futures trading is 109 by 2011 on 21 recognized exchanges. Of all the commodities, bullion contracts shares 40.75%, most of the total turnover. Among all exchanges, MCX enjoys the biggest share of turnover of more than 82% of the total traded value.

9 thoughts on “Development of Derivative Markets in India

  1. trading is like a university edaoctiun, it requires on the order of 10 to 20 years to become proficient and you have to be ready to accept it as a full time career. With that said, the broker that I use is oanda. I use this broker mainly because it allows smaller lot sizes which allows me to be very flexible with my exposure.My recommendation- do not trade with less than 50k account. Do not trade live until you have risk capital (money that you will not need or regret losing) or minimum few years on paper accounts.Forex research is a huge topic. Do not fall for technical analysis, it works in some situations, but the best bet would be to read the prices correctly via price patterns and timing. Do not trade during non farm payrolls or during tokyo and NY lunch hour. Trade during the overlap of US UK sessions for best liquidity. Watch for inflation levels, what central bankers say (and if what they are saying is just a warning or if they are serious about it).For example you would want to monitor the japanese central bank decisions right now because their currency is strong enough to make their bank sell it to lower the price to keep exports competitive. For CAD, watch for gold prices (oil is their major export). ect.FINALLY: the only way to make money in forex safely is with law of large numbers in terms of capitalization. You have to have an account upwards of 50 mil, so this is not a get rich quick thing. The real money lies in market making and dealing.

  2. I’m really inspired along with your writing talents as well as with the structure on your blog. Is that this a paid topic or did you customize it your self? Either way keep up the excellent high quality writing, it is uncommon to see a nice weblog like this one today..

  3. I am no longer positive the place you are getting your info, but great topic. I needs to spend some time finding out more or figuring out more. Thank you for fantastic information I used to be searching for this info for my mission.

  4. I enjoy your site. My thanks for taking the time. I’ll come to this site to read more and recommend my neighbors about your writing

  5. Wow, superb blog structure! How long have you been blogging for?
    you make running a blog look easy. The whole glance of your site is wonderful,
    as well as the content material!

  6. It is actually a nice and helpful piece of information. I am happy that you simply
    shared this useful info with us. Please stay us informed like this.
    Thank you for sharing.

Leave a Reply to Ronald Cancel reply

Your email address will not be published. Required fields are marked *