It will takes another nine-to-ten months for derivatives to take off and volumes to reach respectable proportions. With the ban on badla effective from July 2, the Securities and Exchange Board of India is hoping that marketmen will have no choice but to turn to derivative instruments for hedging and speculation.
"The transition period will not be without pain," said Sebi board member, J R Varma, adding that the pain will mostly be in the form of adjusting to the new mechanism, changing their mind-sets and finding out ways and opportunities to optimise returns.
In overseas markets, it normally took one-and-a-half to two years for a new product to gain acceptance and stabilise. Since index futures have been here for almost a year now, Varma said it would take until the end of the year for it to gain depth. "If the volume is still Rs 100 crore at the end of the year, there is a problem," he said.
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With regard to options in individual stocks, Varma said the basic valuation model of covering 99 per cent VaR (value at risk) will remain the same but the actual margining and risk management systems will be more complex than for index futures.
Margining and position limits would be the major risk containment features, he said, pointing out that what was important was the safety of the markets (the exchanges should not default) and price manipulations were aberrations which the market should be able to absorb without collapsing.
Exchanges are more or less ready with the necessary software to kick in derivatives trading -- it only remained for the market participants to plunge into it straightaway.
While futures in individual stocks is still viewed suspiciously by Sebi, Varma said many countries in the world (including the UK, Hungary, and Canada) were already having the product.