The Securities and Exchange Board of India (Sebi) appointed panel on derivatives has suggested that Sebi and the Reserve Bank of India (RBI) should move "in an integrated fashion" with trading in futures, options and swaps using a variety of underlyings, such as rupee-dollar rate, the short-end interest rate, the long-end interest rate, Mumbai Inter-bank offered rate (Mibor) etc.
The Sebi Advisory Committee on derivatives, headed by former board member, J R Varma, said "the basic principles underlying the running of futures markets and their regulation are the same. Having a common trading infrastructure will have important advantages. The committee, therefore, feels that the attempt should be to develop an integrated market structure."
The committee has introduced a new slab for member-wise positions. It has suggested that the member-wise position limit should be 20 per cent of the market-wide position limit in the stock where the market-wide position limit is less than or equal to Rs 250 crore.
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The panel said, "This would ensure that when the open interest in the scrip is large (close to the market wide limit) it is distributed over at least five members with no member holding more than one-fifth of the open interest." But some member of the committee have expressed concerns.
On the scrip-wise limits, the committee has proposed that within the market-wide open interest of Rs 50 crore, the limit applicable be at Rs 5 crore. But when the open interest crosses Rs 50 crore, the limit applicable is proposed 10 per cent of the market-wide open interest or Rs 20 crore, which ever is lower. However, overall member-wise limits across all equity based derivatives contracts are proposed to be fixed at Rs 75 crore.
On the issue of margins, the panel has suggested that if the cash segment could also migrate to the derivative market practices, it should be possible to harmonise the margin levels between the two markets.
The panel has decided that the number of stocks under derivatives trading will be increased since according to the panel, "to the extent that a larger set of stocks have trading of stock options and futures, the universe of 'highly liquid' stocks is likely to become larger.
A change in the contract size has also been recommended since "the environment under which the Rs 0.2 million limit was introduced has undergone a dramatic change and the time has now come to do away with the minimum contract size in value terms." The panel noted that globally the contract size is determined by the exchanges without any intervention from the regulators.
The panel has also said that the legal framework governing trading, clearing & settlement in the derivative segment should be separate from the cash market segment. Membership of the derivative segment should be separate from the cash market segment.
The panel has taken the view that "It is possible for a sub-broker to be registered as a trading member with fairly low capital requirements."
The view taken by the committee is that Sebi should be open to any proposal from the exchanges for assimilating sub brokers into the market structure so long as these are consistent with the twin requirements of client level gross margins and regulation of sales practices at client level.
The panel has also said that mutual funds which use derivatives for hedging purposes should make full disclosures of their derivatives trading strategies in their offer documents.