Derivatives Trading in India|Finance|Case Study|Case Studies

Derivatives Trading in India

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Case Details:

Case Code : FINC026
Case Length : 15 Pages
Period : 2000 - 2003
Pub. Date : 2004
Teaching Note :Not Available
Organization : Bombay Stock Exchange
Industry : Banking and Financial Services
Countries : India

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Introduction Contd...

For instance, in the month of January 2004, the value of the NSE and BSE derivatives markets was Rs.3278.5 billion (bn) whereas the value of the NSE and BSE cash markets was only Rs.1998.89 bn. (Refer Exhibit I and II). In spite of these encouraging developments, industry analysts felt that the derivatives market had not yet realized its full potential. Analysts pointed out that the equity derivative markets on the BSE and NSE had been limited to only four products - index futures, index options and individual stock futures and options which were limited to certain select stocks...

Background Note

The initial steps to launch derivatives were taken in 1995 with the introduction of the Securities Laws (Amendment) Ordinance, 1995 that withdrew the prohibition on trading in options on securities in the Indian stock market.

In November 1996, a 24-member committee was set up by the Securities Exchange Board of India (SEBI)6 under the chairmanship of LC Gupta to develop an appropriate regulatory framework for derivatives trading.

The committee recommended that the regulatory framework applicable to the trading of securities would also govern the trading of derivatives.

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Following the committee's recommendations, the Securities Contract Regulation Act (SCRA) was amended in 1999 to include derivatives within the scope of securities, and a regulatory framework for administering derivatives trading was laid out.

The act granted legality to exchange-traded derivatives, but not OTC (over the counter) derivatives. It allowed derivatives trading either on a separate and independent derivatives exchange or on a separate segment of an existing stock exchange. The derivatives exchange had to function as a self-regulatory organization (SRO) and SEBI acted as its regulator.

The responsibility of clearing and settlement of all trades on the exchange was given to the clearing house which was to be governed independently. Derivatives were introduced in a phased manner. Initially, trading was restricted to index futures contracts based on the S&P CNX Nifty Index and BSE-30 (Sensex) Index...

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6] SEBI is the apex regulatory body for the securities markets in India. The basic objective of SEBI is to protect the interest of small investors and to promote the development of, and to regulate the securities market.


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