Sebi goes slow on nod for new derivative products

The Securities and Exchange Board of India (SEBI) is going slow on approvals of several index-based derivative products. Several new products proposed by both the exchanges had not been cleared by the regulator owing to concerns over their suitability to the small investors, said an official familiar with the development.

Clearance of new index products has taken a backseat since U K Sinha took over as the chairman of SEBI over a year ago.

The regulator has not cleared several products, including derivatives based on the India VIX, an index that tracks the volatility of the market, and rupee denominated European indices, such as FTSE 100 and DAX. Also options on foreign indices such as Dow Jones and S & P 500, which are already trading in futures contracts, are yet to see the light of day.
 

Naresh Maheshwari, president, Association of National Exchange Members of India (ANMI) said, “The regulator is taking time because world over experts are divided over the utility of these exotic derivatives. They may increase the revenues for the market intermediaries but may not be suitable for small investors.”

Maheshwari, who is also a member of the regulator’s secondary markets advisory committee, said the current state of markets is also not suitable for introduction of these new indices. “Take for example, the volatility index the Nifty fell 150 points yesterday and recovered 100 points on Tuesday. Do you think small investors can handle this kind of wild movements?” he asked.

The European indices are out of favour because of the sovereign debt crisis and the uncertainty surrounding the entire European region. Officials are of the view the ongoing crisis in Europe does not augur well for these new products. Over a year ago, NSE and FTSE had announced their intention of collaboration and had said they are in talks for licensing of FTSE 100 to NSE for facilitating launch of derivative contracts trading on FTSE 100 in NSE.

In a conference organized by German exchange Deutsche Boerse last year, BSE chief executive officer Madhu Kannan had also said that the domestic bourse will explore possibilities of tie-up to bring futures based on the DAX index for trade in India.

Even this plan has not seen fruition. The National Stock Exchange has launched trading in two indices based on the American stock indices, namely the Dow Jones Industrial Average and S&P 500. These indices saw a daily average turnover of Rs 100 crore in 2012. In comparison, Nifty derivatives dominated the space with over Rs 88,000 crore daily average volumes. Most other index-based derivatives, such as Bank Nifty, Mini Nifty and CNX IT see low volumes and together account for less than 5 per cent of total index-based derivatives volume.

In January 2011 under then chairman C B Bhave, SEBI had cleared floating of derivatives based on foreign indices.

SEBI had also put a clear framework in place for introduction of derivatives in association with foreign exchanges. It had identified 24 exchanges across the globe for this purpose.

The stock exchanges that SEBI has mandated are BM&FBOVESPA, Chicago Board Options Exchange (CBOE), CME Group, ICE Futures US, International Securities Exchange (ISE), MexDer, Montréal Exchange, Nasdaq OMX PHLX, in the Americas, Australian Securities Exchange, Bursa Malaysia, Hong Kong Exchanges, Korea Exchange, and Osaka Securities Exchange among others.

SEBI also said that in order to be introduced on the BSE or the NSE, derivatives on these foreign exchanges should be among the top 15 globally by number of contracts traded or should have a minimum market cap of $100 billion. They should also be broad-based, containing at least 10 stocks as constituents, with no stock having a weightage in excess of 25 per cent.

SEBI said failure to comply with above criteria, after introduction of the derivatives for three consecutive months, would automatically lead to introduction of fresh contracts being frozen. Exchange officials were not available for comment.