Equity futures’ volume growth trails those in currencies, commodities.
Derivative markets in the country are set for a big jump in the coming years, as regulators have an open mind on the expanding horizons on the products covered for trading on exchanges.
The Securities and Exchange Board of India (Sebi) had, in principle, approved several such products. Most are for the debt and currency markets. This is at a time when the commodities and currency futures markets are growing bigger then equity futures. On most days in March, the average volumes in currency and commodities futures were higher than equity futures. This is despite index futures not being permitted in currencies and commodities. However, if volumes in option trading are considered, the equity market is still well ahead of other markets but in the near future, these would also get traded in the commodities and currency markets.
A week earlier, Sebi permitted five-year options in equity and in trading on the official volatility index. It decided in principle to permit physical settlement in equity derivatives, too. It also asked exchanges to prepare several indices with the aim of allowing derivative products based on those in the currencies and bond markets. According to Sebi, the operational modalities for introduction of currency options (USD-INR) are being worked out by the RBI-Sebi Standing Technical Committee.
Exchanges need to prepare
Once exchanges are ready with indices in currencies, derivative trading on those will be permitted. Sebi’s derivative committee had recommended cross-currency futures trading on exchanges — dollar-yen, dollar-euro and so on. It is learnt that regulators, particularly the Reserve Bank of India, are not in favour of that. At present, only futures in foreign currency denominated in rupees are permitted.
Sebi had also asked stock exchanges to construct a Bond Index (for both corporate bonds & government securities) and disseminate these to permit derivative trading as in equity indices. Introduction of various exchange-traded credit derivatives is on the cards, in a phased manner in consultation with RBI. This includes trading in credit-default swaps. Sebi is also open to allow trading in third-party exchange traded products such as structured warrants, though it first wants an over the counter market to develop in such products. Many more new derivative products are expected to be introduced across markets, which include trading of options in currencies on exchange platforms, futures and options in currency indices, option trading on interest rate futures and exchange-traded third-party products such as structured warrants.
Average daily volumes in commodity futures in March so far had been Rs 27,748 crore in equity (stock and index futures), while futures volumes in four currencies were Rs 30,890 crore (of which Rs 27,007 crore were in rupee-dollar and Rs 3,882 crore in rupee/yen-euro-pound.) The commodity futures volume was Rs 37,298 crore, the highest among all markets.
Currencies are traded on two stock exchanges, while commodity futures are traded on four. Equity derivatives are traded on the National Stock Exchange and the Bombay Stock Exchange, but the latter’s share was minimal. Options trading is also a big market, many times the volume of of futures on the NSE. Options are also a cheaper hedging instrument, as the risk is confined to only the premium paid by buyers of options.
Global trend here, too
Globally, said an official from a leading exchange, the currency and commodities markets are much bigger and the trend is now visible in India, too.
Even in commodities, once Parliament amends the Forward Contracts Regulation Act, introduction is possible of index futures, weather derivatives and options. Says U Venkataraman, executive director, MCX-SX: “World over, equity is just 15–20 per cent of the asset classes traded on the exchange platform and bonds, interest rate futures, currency, commodities, etc constitute the remaining 80–85 per cent.”
He said, “The currency segment witnessed robust growth from a mere Rs 200 crore per day when launched 16 months ago to close to Rs 38,000 crore per day in a little over a year, which is higher than the cash equity segment. For true financial inclusion, we will need world class exchanges with domain expertise and management bandwidth to develop new asset classes on the exchange platform. Indian financial markets will witness transformation in its true sense with the emergence of new-generation, multi-asset class exchanges such as MCX SX.”
In currencies and commodities, foreign institutions are not allowed. In commodities, even domestic institutions and banks are not presently permitted to trade. Once the window is opened for more institutional players and more instruments are introduced in these markets, they will grow much bigger then equity futures, said an official from a leading exchange.
