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It's time now to say good bye to Badla and all such deferral products like ALBM and BLESS. Come July 2, the Indian bourses will be ushering into an era of options finally. In a move which is bound to have far reaching implications, the market regulator SEBI has finally decided to put a ban on badla and all deferral products, effective July 2, 2001. The regulator has given time till September 3, 2001 to liquidate outstanding deferred positions as of the current settlement worth close to Rs 2,000 crore. It has said that any additional deferred position taken after May 15 would have to be liquidated by July 2, and no new deferred positions will be allowed from July 2. This gives a breathing space to the players to square up their position and is expected to ease the selling pressure. The fact that market has sustained the upward momentum, post-ban announcement, vindicates that belief.

The regulator has further announced that another 251 scrips will be put into rolling settlement mode. This will be in addition to the 163 scrips, which are already in the compulsory rolling mode. These are the scrips which form part of the list of scrips where badla or ALBM was allowed. SEBI has said that all scrips which do not form part of this list will be brought within the ambit of rolling settlements from January 2, 2002. In the interim period, however, the regulator has decided to put in place a uniform settlement cycle for stocks which are not in rolling mode. This cycle would run from Monday to Friday and would be followed across all the stock exchanges. This would effectively lead to the closing of the door on menace of inter-exchange arbitrage, which had been outlined as one of the reasons for the recent stock market scam.

In another bold initiative towards bringing the Indian capital market at par with the global practices, SEBI has decided to do away with the price bands (circuit filters) for all stocks in the rolling mode. It sounds logical to give an adequate exit opportunity to investors once the trading period is reduced to a single day from five days. Though the price bands would continue to be in place for other scrips,  95 percent of all trading volumes would be exempt from any price bands. SEBI has also decided that the global practice of having index-based circuit filters will be introduced. It means that while there will be no price bands on individuals stocks, the market could be frozen if the entire index itself swings sharply. The extent of the circuit filter would be worked out shortly.

To keep a check on another malaise, insider trading, the regulator has approved a code of conduct and a preventive framework. The regulator has also paved the way for launch of options trading on individual stocks, though it has deferred the launch of futures on individual stocks.

On this front, the BSE has recently entered into an agreement with Chicago Mercantile Exchange (CME) to adopt its "Standard Portfolio Analysis of Risk" (SPAN®) system for calculating margin requirements and managing risk. Introduced by the CME in 1988, SPAN has become an industry-standard, adopted by more than 30 exchanges and clearing organizations worldwide including Tokyo Stock Exchange, Singapore Exchange and Hong Kong Futures Exchange. SPAN was the first futures industry performance bond system ever to calculate requirements exclusively on the basis of overall portfolio risk. SPAN is a portfolio-based system, which comprehensively evaluates the impact of specified market events on futures and options portfolios. A key element of this process is granting credit for net long option value, and assessing additional charges for net short option value. These long option value credits and short option value charges comprise the premium component of the overall, or "total", performance bond calculation. The requirement assessed upon long options positions is designed to reflect the fact that the holder of these long options may not be able to liquidate them at their current market value. The difference between the current value of a given long option position and its liquidation value under a "worst case scenario" of market movement is derived as part of the scanning risk calculation, and serves as a haircut against the option's full value to reflect potential liquidation losses. The BSE has said that it will adopt CME's standard portfolio analysis of risk management to compute margin requirements for derivative products like options and futures. The exchange has said that this will also be used for recognizing risk offsets between the cash and the derivatives markets.

The market appears to be divided on the issue of ban on badla. According to one section of the market, as badla has been around for a long time it should have been allowed to continue, albeit with more stringent risk measures such as upfront payment of margins. Another view is that so long as badla mechanism is available derivatives will never take off, as given a choice between badla and other derivatives, players would opt for a mechanism like badla, which they have been used to for decades. Not withstanding such never ending debates, the fact of the matter is that, we need a market where rules of game are different for each discipline - be it rugby or football. And, the writing on the wall is clear - it's time to clean one's act or be ready for extinction which could be just a few strokes away.

Amit Singh

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