New F&O products will boost liquidity

The proposal to introduce more products, including mini-contracts on equity indices, volatility index-based derivatives and currency futures will increase liquidity in the derivatives segment, besides luring more retail and high-networth investors into the segment.

"These products are not very complicated for the retail investors. In the existing derivatives market, the local retail investors account for 70-80 per cent of the trading volumes," said Sanjiv Shah, executive director, Benchmark Asset Management.

Sebi, at its board meeting yesterday, gave in-principle approval for the introduction of mini-contracts on equity indices, options with longer life/tenure, volatility index and F&O contracts, options on futures, bond indices and F&O contracts and exchange traded currency futures.

Benchmark Asset Management, which has an exchange traded fund (ETF) on Bank Nifty (Bank BeES) and a Gold ETF, is bullish on three products - currency futures, bond futures and volatility options, Shah said.

The current minimum lot on equity index derivatives is Rs 2 lakh and multiples, which barred smaller investors from taking a bet on the derivatives market.

"The new proposal for mini-contracts on equity indices will allow retail investors to buy contracts with a lot size of say, Rs 40,000 or Rs 50,000," added Gurudatta Dhanokar, derivatives strategist with Almondz.

Experts however said that the 6-month and one-year options contracts may not gain immediate popularity, considering that the options segment is yet to attract big volumes compared with futures. But foreign investors could be attracted to the long duration options contract.

"Apparently, these products were available to foreign investors through the participatory note route. Sebi is trying to bring the offshore market onshore," said an analyst with a foreign brokerage outfit.

Only one-month, two-month and three-month options contracts are available in the domestic markets at the moment.

The Reserve Bank of India would have to act fast to allow new products that come under its jurisdiction such as bond futures and currency futures.

"What we have recommended is a basket of products. The RBI and the Union Government have to study and give regulatory approvals before the products are introduced. We expect to see the products in 6 months to a year," said a member of the Sebi's Derivatives Market Review Committee.