Expansion in derivatives products put on hold

Expansion of derivative products outside the equity segment is being put on hold for the time being.

As a result, the stock exchanges, which were planning to introduce interest rate futures during the first quarter of the current calendar year, will have to wait till the regulators give a go-ahead. Even the expansion of currency derivatives, that was expected to be launched in the second half, would be delayed further.

TIME NOT YET RIPE

• Stock exchanges were planning to launch interest rate futures during the first quarter of the current financial year
•  Now, the bourses will have to wait for a go-ahead from the regulators
•  Interest rates and currency futures are regulated jointly by Sebi and RBI
•  Expansion of currency derivatives, which was expected to be launched in the second half, would also be delayed

Derivatives are tools based on underlying assets used to hedge risks. Interest rates and currency futures are regulated jointly by the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI). But Sebi was the designated single-window agency to clear proposals as both the derivative products were meant for trading on the stock exchanges.

During a recent joint meeting of the regulators, it was pointed out that the time was not yet ripe to expand the list of derivative products in general as they were perceived to be speculative rather than hedging tools.

The currency futures trading was first launched in August 2008 in rupee-US dollar contracts, and foreign institutional investors (FIIs) were barred from trading in exchange-traded currency futures. While launching the product, the then Finance Minister P Chidambaram had suggested that the regulators consider allowing FIIs and more currencies to be traded in the segment.

Although an in-principle decision was taken at least six months ago by the two regulators and even the government to expand derivatives beyond the rupee-US dollar currencies to cover credit and interest rate derivatives, the RBI raised a red flag over the introduction of credit derivatives.

The banking regulator was of the opinion that India should wait till there were more signs of a recovery before credit derivatives are launched. The Finance Ministry was, however, pushing RBI to launch credit derivatives, believing that the global crisis should not be allowed to impede any expansion of the sector.

In fact, with a combined daily volume in currency futures on all the exchanges rising to around Rs 5,600 crore and open interest of 546,000 contracts (of $1,000 each), the regulators have decided to revise upwards various exposure limits, including at the level of clients and broker-members. The revised limits were announced on Tuesday.

Even in the case of interest rate derivatives, it would have been a re-launch as the product was first introduced in 2003, but did not pick up due to a faulty design.

But interest rate and credit derivatives are not the only casualty of the common stand taken by the regulators. The expansion of the currency derivative segment, by allowing more players and futures trading in currency other than US dollars, has also been put on hold, according to a source in one of the regulatory authorities.