The absence of a strong debt market and proper pricing mechanism are reasons for the lack of institutional interest in the domestic derivatives market.
Anand Rathi, president of Bombay Stock Exchange (BSE) said, "The biggest hurdle in the derivatives market today is the lack of a pricing mechanism for contracts. Normally, pricing of derivatives is dependent on interest rates in the country and there are arbitrage opportunities across the debt market, derivative market and the equity market. In the absence of a debt market, no proper pricing mechanism has been established yet in the country."
Arbitarge opportunities are essential for the healthy development of a capital market. In a derivatives market, there are hedgers, arbitrageurs and speculators. Rathi said: "Today we only have speculators in the derivatives market as hedging is virtually absent without a strong presence of index funds. Arbitrage cannot be done because there is no debt market in the country. So only speculation can be done and no market can be developed with mere speculators. Hence, institutional presence in the derivatives market will take time."
Also Read
Commenting on the BSE's derivatives plans Rathi added, "We have already trained 10,000 people in derivatives and this is a record. Further, we are also talking with our members and sorting out their problems. We are also making presentations to institutions to persuade them to trade in derivatives, though this is one area which is moving slower than expected."
Earlier this month, BSE's volume in derivatives had touched an all time high of around Rs 16 crore.
On the possibility of tie-up for exporting BSE Sensex Futures to other markets, Rathi added, "We are still talking to a number exchanges in Europe, US and South East Asia. Further, we believe that this should be done after we have a very strong domestic derivatives market. If there is no business in the home market then how can you expect a market abroad?"
BSE proposes to come out with index options and option on shares, subject to Sebi approval. "It will take us another two months to get the software ready. By February-March 2001 we may introduce some new derivative products," Rathi maintained.
Meanwhile, BSE has announced that it has decided to accept applications for limited trading membership for the derivatives segment up to December 31, 2000. A limited trading member of the derivatives segment enjoys all the rights, privileges, obligations and liabilities of a trading member except for voting rights.