Reserve Bank of India (RBI) deputy governor Shyamala Gopinath on Monday said the introduction of credit default swaps is under serious consideration.
?We are at an advanced stage of introducing other currency pairs for currency futures and are examining the issue of allowing plain vanilla currency options in consultation with Sebi,? said Gopinath.
Gopinath was speaking at the sidelines of the FIMMDA-PDAI annual conference in Mumbai. Speaking about corporate bonds, she said the feedback on repo in corporate bonds has been received on the draft guidelines, which has largely been positive but the key issue that has been raised relates to inclusion of short-term money market instruments such as CDs/CPs as eligible securities for repo.
?To begin with, it is proposed to start only with highly rated bonds. The final guidelines in this regard would be issued shortly,? she said.
Gopinath, however, clearly noted that regulatory comfort and assessment should therefore be a critical determinant in pursuing financial reforms.
?It has been clearly evidenced during the crisis that financial sector development per se cannot be an objective in itself. Reforming financial markets involves improving access to simple, transparent and easy-to-understand products. Increasing complexity does not facilitate the market mechanism. The purpose of financial instruments is to transfer risk to those that understand these risks, not to hide or camouflage them,? she said.
Based on the assessment and experience, further liberalisation measures for expanding the product menu could be undertaken, she added.
However, participation of foreigners in new products and the financial markets in general would continue to be dictated by the capital account management and financial stability imperatives, Gopinath said.
In regard to derivatives, she said that OTC markets in India are well regulated, unlike many other jurisdictions, to address issues of leverage and customer appropriateness and suitability. Only OTC contracts where one party to the transaction is a RBI regulated entity is considered legally valid. ?Suitable reporting and post-trade clearing and settlement mechanisms are being further strengthened. Given the incentive structures of these market, convergence of regulatory frameworks for OTC and exchange traded markets cannot be an end in itself under present circumstances, though it is a long term goal,? she said.
The development of markets is also influenced by tax policies. Debt instruments for instance do not enjoy tax exemptions of the nature enjoyed by equity instruments whether on income or capital gains. Mutual funds fixed income products enjoy certain tax exemptions not available to banks. But this is outside the regulatory purview. However, if these policies introduce any vulnerability in the financial system there is need to address this through appropriate macroprudential and microprudential regulations, she said.
Talking about currency derivatives, Gopinath said the traded volume in dollar-rupee futures contracts traded on all the exchanges gradually increased over the period and touched the high of $5.46 billion on December 8, 2009. The average traded volume remained at $3,384 million during November 2009. On the other hand, the open interest position in the currency futures remained at around $1 billion during the month with the average of $ 1105 million.
?The substantial rise in the currency futures volume, in a sense, is quite natural keeping in view cash settlement, the lack of requirement of underlying exposure and absence of any restriction on cancellation and re-booking, as currently applicable in the case of forward transactions,? she said.