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Its been fairly long since derivative trading started off on the Indian Indexes. Activity has failed to really take off with low figures being transacted in terms of Value and Volumes. The introduction of derivatives trading was hailed by the punters in the capital markets but has not really brought about a wave so as to speak. There are several factors which impede the growth of the derivatives markets in India. Of these factors the absence of clear guidelines on tax-related issues and the high cost of transaction are the most prominent.

The Bombay Stock Exchange has now decided to introduce a new index which would now substitute the BSE-30 in order to boost derivatives trading. The new Index will be narrower and more sensitive than the 30-share Sensex. The derivatives markets is generally a very volatile market and operators in these markets would prefer a more volatile index than the Sensex. It could be said that the interest of the operators in derivatives trading would be directly proportional to the volatility in the underlying security which would mean that more the volatility, more the interest. BSE is thereby developing the new index to suit the traders in the derivatives market.

To elaborate more on this special index it needs to be clearly stated that this index will include several technology scrips that have not found a place in the existing index. Apart from tracing in index futures, the bourse plans to introduce trading in other products in the derivatives segment such as the trading in stock options and futures. This would be introduced towards the beginning of the next fiscal. The new index is expected to be in place by April 2001. Trading in index options is likely to commence in November this year and would begin with 30-50 scrips. These would include scrips in the current Sensex and also some of the scrips on the Nifty (NSE-50).

The criteria for the selection of these scrips would be liquidity and market capitalization. The aspect that rolling settlement has been mandated for nearly all the actively-traded stocks, speculative activity is likely to switch to the derivatives market. The derivatives market is expected to see a spurt in activities by the end of this fiscal. The derivatives in India needs to catch up with other major bourses the world over wherein the turnover in the derivatives segment far exceeds the cash segment.

The BSE recently introduced limited trading membership to investors in the derivatives segment. This would involve an entrance fee of Rs 1 lakh. Initiatives have been taken in terms of a nationwide training program to disseminate information on derivatives trading. The CEO of derivatives segment of BSE, Manoj Vaish has stated explicitly that the volume of derivatives trading in India was currently very low compared with the cash volumes. The introduction of the limited trading membership (LTM) would enable members to taste the flavor of derivatives without having to accept the liability of paying margin money to the exchange. The liability would be borne out by the clearing member who would act on behalf of LTM.

However, an LTM would neither be entitled to hold any office of the exchange neither have voting rights. The exchange would charge annually an amount of Rs 25,000 in addition to an initial fee of Rs 3 lakh, out of which Rs 2 lakh would go to the investor protection fund and the balance to trade guarantee fund. The LTM would have all the rights and privileges of a trading member and have to be registered. All guidelines issued by the Stock Exchange Board of India would apply to the LTM.

Other initiatives to spruce up derivatives trading is the plan to develop a retail debt market and also bring about the participation of the bourse in the wholesale debt market. Players in the derivatives markets could expect to see some changes in the future and hope that the Indian derivative markets take off without further snags.

DEEPAK V KURIAKOSE
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