BS Srinivasalu Reddy

Mumbai, June 3: The Indian derivatives market is ready for the launch of futures on individual stocks (FIS), as it has matured enough in derivatives trading during the last one year of trading in index-based derivative products on The Stock Exchange, Mumbai and the National Stock Exchange, according to the Securities and Exchange Board of India board member Prof JR Varma.

“If any exchange wants to introduce FIS directly it should be allowed to do so. This has been suggested by a Sebi committee last year,” Prof Varma told The Financial Express.

“Now, we have reached a stage where our market is ready for products like FIS. The derivatives market is established. However low the volumes are, it’s a functioning market and rolling settlements were tried in 1, 2, 3, 4 and 5 days carry forward system,” Prof Varma said.

On why the product is banned in the US, he said that was done for different reasons, other than the feasibility. FIS is not recognised as a derivative product under the US laws. After making necessary amendments to the statute recently, the product is scheduled to be launched there by August 2001.

FIS is already existing on the London Stock Exchange. The Eurex, the European stock exchange, is weighing its options as it found that the product is not commercially viable due to low volumes.

Two years back, when the Sebi committee on carry forward under rolling settlements was discussing the issue, there was an impression that there was no experience of derivatives markets in the country and that trading in index futures was necessary before introducing FIS kind of products, he said.
“However, my view that the Indian market should go in for FIS products as hedge instruments was in minority in the committee, which submitted its report in January 2000,” Prof Varma said. The derivatives committee, which submitted its report in April 2001, was also categorical that these kinds of derivative products could be introduced.

Today, the absolute volumes of derivatives market are low, but this was also due to the low percentage of rolling settlement volumes. People were preferring daily settlements instead of going in for derivatives as hedge instruments. “There was a feeling that familiarity of badla would be of help for understanding the derivatives products, especially of the FIS kind, at that time (in 1999-2000), but that does not seem to be the case now,” he added.

With the view that badla could be a precursor to FIS, the committee has recommended introduction of 1, 2, 3, 4 and 5 day carry forward products under rolling mode, Prof Varma said. The committee on badla under rolling settlement said it had considered the relationship between weekly carry forward system under the rolling mode and outright futures contracts in individual stocks, and suggested that the weekly CFS under rolling mode be introduced as a badla product to make it easier for the market to understand and use the product.

The committee also said, “Exchanges must be allowed to introduce FIS directly (without first creating a carry forward product and then migrating to a future contract).

While agreeing to the view, former NSE managing director Dr RH Patil and Prof Varma recommended that the weekly carry forward product should swiftly migrate to a full-fledged FIS. When this is done the product will cease to be regulated as a carry forward product and would be regulated exclusively as a derivatives contract. This is based on the view that the risk management of a proper futures contract was much better understood.

“I have not changed my view since then on the introduction of FIS,” Prof Verma said. However, Dr Patil offered no comment.

On the other hand, the majority of the committee was of the view that the two products — weekly CFS under rolling mode and FIS — can coexist.