History at BSE, futures trading begins

So what exactly happened today at the BSE, and what’s going to happen on the next trading day, the one after that, and so on?

Essentially, futures’ or derivatives’ trading, which began today on the BSE and will begin on the NSE on Monday, is exactly like buying or selling company shares, except in this case what is being bought and sold is different. What is being traded in this case is the Sensex itself — so if the Sensex goes up or down, the investors trading in the value of the Sensex will win or lose. On the NSE, what will be traded will be the value of the Nifty. And, at some much later date, investors in India will be able to trade on anything, say the Rupee-Dollar rate, the bank interest rate and so on.

How this operates is simple. Kaji has bought the Sensex’ at 4,755 on the last Thursday of June. Now let’s say the actual value of the Sensex is 4,500 on that day. So Kaji’s account will be debited by 255, and this will be multiplied by 50 (the BSE has decided this is the figure) — so Kaji’s account will be debited by Rs 12,750.

SEBI board member J R Verma, who formally launched the trading, said Sensex futures are the first derivative contracts in India, but, certainly, they will not be the last contracts in the segment.’ Derivatives trading is essentially a form of forward trading in derivative products like stock indices. An investor can buy or sell index at a future date. His gain/loss will be determined on the basis of the real level of the index on that date.

As expected, the volumes were quite small on the first day of trading. Commenting on the demand for June contracts, dealers said that most of those who took up the contracts were not keen on taking a market position so far in the future. The closing price for the June contract was 4,783, and the total number of transactions were 104.

The Parliament had earlier amended the rules paving the way for futures trading in India. We will see that variety of instruments are launched in the segment in the near future,’ Verma said.

BSE President Anand Rathi termed it as a historical occasion for the Indian capital market.’ As the premier stock exchange it has launched derivatives futures based on Sensex, which was globally considered to be the benchmark index for the Indian capital market, he added.

Indian stock markets have been waiting for derivatives trading for quite some time now — since the LC Gupta committee submitted its report on derivatives in 1998. Subsequently, SEBI appointed another committee headed by JR Verma to look into the risk management aspects of derivatives trading.

Brokers, however, are not very keen to start derivatives trading in a hurry. Awareness about derivatives among clients is still very poor. The strict margin system is also a disincentive especially when the markets were going through a lean phase,’ said a BSE broker, adding, only foreign investors, financial institutions, mutual funds and high net worth individuals could be interested in participating in derivatives trading through select brokers.’

SEBI has also put in place stringent entry norms for derivatives trading. Clearing members with or without trading rights should have a net worth of Rs 3 crore while security deposit will be Rs 50 lakh broken into cash, cash equivalent and securities. Trading members require a minimum net worth of Rs 50 lakh and a security deposit of Rs 10 lakh.