Bhatnagar is an engineering graduate and a post-graduate from the Indian Institute of Management (Ahmedabad). He started his career with Hongkong and Shanghai Banking Corporation and moved on to become the head of trade finance.
He moved on to Prime Securities where he headed the investment banking division. He has also been a consultant for international markets with focus on derivatives. Excerpts from an interview:
What are the areas of Refco's operations?
Refco is one of the world's largest registered futures commission merchants and has memberships on all the principal US and international exchanges. It also has a presence in the markets for fixed income securities, international securities, foreign and metals exchanges. It also has expertise in the area of funds management and finance. In the Indian context, we are concentrating our energies more on the financial futures side. This is so because we have a well established regulatory and exchange mechanism for the equity segment.
But that is not the case on the commodities side in India. Therefore, despite the fact that we are strong at a global level on the commodities side, in India our plans for the commodities segment are on a low key at the moment.
For Internet and futures trading, we have a tie up with Satyam Infoway. In fact, this is the first time in Refco's history that we have gone in for a tie up with a local partner. We feel Satyam Infoway's strength in certain areas such as their existing Internet services provider (ISP) network gives an ideal platform for the partnership.
What is Refco's position in the global derivatives arena?
Refco is one of the largest members of the US and London exchanges , the SIMEX, the SFE( Sydney Futures Exchange) as well as the MATIF(Marche a Terme International de France).
Refco has a pre-eminent market position in the most actively traded contracts including treasury bonds, Euros, dollars, stock indices and currency. Refco's client base includes financial institutions, corporations, businesses and pension funds. In fact, we also have sovereign governments as our clients.
Our global execution and clearing capabilities have enabled us to command a significant marketshare in futures and options markets in different parts of the world.
Our credibility is enhanced by the absence of any proprietary trading account.
What needs to be done for the derivatives market to take off in India?
Most of the regulatory and infrastructural requirements are already in place. However, the level of investor awareness of the usability and effectiveness of derivative products needs to be increased. For this purpose, we have initiated measures which we are implementing with the help of exchanges and regulatory authorities.
What are the inherent strengths of the Indian market which would aid the development of the futures markets?
The equity cult in India is very diverse and vast. There is a high level of speculation visible in the Indian markets with only twenty per cent of transactions resulting in delivery.
People are already used to the concept of day trading where no delivery of securities is taken even at the end of the settlement. This is exactly what the futures market is all about, where settlement is done totally in cash. In that sense, it would not be difficult for people to adapt to trading in futures and other derivative products.
Investing population as a base already exists, it just has to be exposed and educated about the new concepts. The concept of hedging one's risks by selling based on the index be it the Nifty or the Sensex is something that most investors in India would think about but were unable to do so since the option was not available till recently.
Are there any fundamental constraints which would hinder the use of derivative products?
An important aspect for financial futures contracts is the cost of carry which determines the price of the futures contract. The cost of carry takes its cue from a bank lending rate for instance the London Interbank Offer Rate (Libor). However, we do not have such an indicative rate which is widely followed in the domestic context. This would in some way hamper the price discovery mechanism, which in turn could have some impact on the liquidity of the products.
Another aspect is that, as compared to company specific events which impact individual stocks, in the case of financial futures contracts the important variable's are macro-economic in nature. In the developed markets, one has a plethora of data on such macro-economic variables since they are widely researched, well developed and tracked. The same is not the case in the Indian context. The absence of a vibrant money market with a high level of retail interest is another area of concern.
All said and done, I believe that the regulator has been fairly proactive in framing regulations and setting the ball in motion.
