Derivatives market to remain on-shore

NetScribes/Salil Panchal

Indian derivatives trading will take an interesting turn when trading in S&P CNX Nifty index-linked products commences at the SGX_DT (the Singapore Exchange Derivatives Trading Ltd) on September 25. This would be a scenario similar to the one where Nikkei futures were introduced on the Simex at a time when the market had not yet caught on with the Japanese investor.

Risk management systems and surveillance relating to trading in these products would automatically be left to the exchange, but the crucial question remains - is there enough trading interest at Simex in a foreign product like S&P CNX Nifty? Secondly, what impact would it have on the Indian derivatives market, which is still in its nascent stages?

As in the other global markets, liquidity at the Singapore markets will see an increase once trading in derivative products begins. The profile of the trading community in such products would be different - ranging from the retail investor to hedge funds and some foreign institutional investors (FIIs).

However, the crucial factor is that price discovery for such instruments would continue to come from the Indian markets. Says JR Varma, director of the Securities and Exchange Board of India (Sebi) and head of the risk-management group at the regulator's end, "Global experience has shown us that there is a home advantage. If the markets in India are faring reasonably well, then trading interest would be higher in India rather than overseas.''

In those terms, despite the derivatives product moving to the Singapore markets, the derivatives market is likely to remain on-shore rather than offshore.

Manoj Vaish, derivatives in-charge at the Bombay Stock Exchange, argues that the S&P CNX Nifty-linked instrument is not likely to command much trading interest at the Singapore markets. "Liquidity might be better at the Singapore markets, but the retail and institutional interest would be stronger here,'' he said.

Trading in index-linked derivatives commenced recently in the Indian markets. According to market circles, the August open interest has been reducing gradually. Open interest is the sum total of all the long positions. While the volumes in the markets indicate liquidity, the open interest indicates depth. Thus, the higher the open interest position, the greater the depth in the markets.

The overall derivatives trading volume at the BSE was of 133 contracts (for August and September), valued at Rs 289.28 lakh and the open interest was of 844 contracts. The NSE has seen 75 contracts valued at Rs 203 lakh, with an open position of 277 contracts.

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