Derivatives trading to be delayed further

The LC Gupta committee set up by SEBI to formulate the guidelines for derivatives trading has decided to introduce only index-based futures. According to the committee, an index is lessvulnerable to vested interests, while a single stock can be easily manipulated. It is also believed that it is much more difficult to influence the index as it is a bunch of stocks holding a cross representation with different weightages. The BSE and the NSE have agreed to start off with their indices 8212; namely Sensex-30 in the BSE8217;s case and Samp;P CNX Nifty index on the NSE.

Both the BSE and the NSE have put in place certain pre-requisites like a separate derivatives segment with an independent set of professionals to run the exchange. Similarly, they have also put in place the software requirements, along with the initial training to the brokers who would either be the clearing members or the trading members. The exchanges have also designed their products, the pricing and margin deposit requirements. However a section of market still believes that although the regulator has within its purview ensured the safety of the markets it continues to remain inefficient in terms of market integrity, which could bethe cause of worry in the derivatives regime.

The finance ministry has accepted some recommendations of the Parliamentary Standing Committee to amend certain provisions of the Derivatives Bill. Accordingly, a note incorporating the modifications in the Bill is being moved for approval of the Union Cabinet. The ministry has agreed that the threshold limit for transactions in derivatives should be pegged at not less than Rs 2 lakh. This is being done to ensure that the small investor does not get caught up in the intricate web of derivatives trading, where large volumes of funds can move swiftly from one account to another.

The ministry is also likely to exempt derivatives trading from stamp duty, if the Cabinet so desires. Though, at the behest of the department of revenue, it has listed out the loss in revenue as a result of the exemption, the ministry has left a decision to this effect on the Cabinet.

A derivative instrument broadly is a financial contract whose payoff structure is determined by thevalue of an underlying commodity, security, interest rate, share price index, exchange rate, oil price, or the like. Thus a derivative instrument derives its value from some underlying variable. However, a derivative instrument by itself does not constitute ownership, it is only a promise to convey the ownership at a later pre-determined or fixed date. The date is fixed by the exchanges. The date also differs for different products.

In derivatives trading, futures contract is a standardised contract between two parties where one of the parties commits to sell and the other to buy a stipulated quantity and quality where applicable of a commodity, currency, security, index or some other specified item at an agreed price on or before a given date in the future.

On the other hand, badla is a crude form of forward trading. A contract in respect of which neither the delivery is given or taken and nor is it offset by an opposite transaction during a settlement period, which may be carried forward to the nextsettlement period at the making up price and the difference between the contract rate and the making up price be settled is a carry forward transaction for which an interest payment is made, which is termed as badla charges. 8220;Badla is a financing mechanism. It encourages short sellers as they generally get badla charges. However both bulls and bears have an equal opportunity to trade in case of options and futures,8221; said an NSE dealer.