The Telegraph
Since 1st March, 1999
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Derivatives panel rocked by dissent

Mumbai, Sept. 30: A Sebi-constituted advisory committee on derivatives has been jolted by dissent from members over position limits in single stock futures.

While the dominant view is that the position limits in single stock futures are more stringent and effective than they were in the carry-forward system, two representatives have taken the line that they ought to be reduced.

The overwhelming feeling is that member-wise position limits should be around 20 per cent of the market exposure, which should be less than or equal to Rs 250 crore. This will ensure that a large open interest in a stock is spread over at least five members with no member holding more than a fifth of the total. Most of the committee members also called for a position limit of Rs 50 crore (more than this limit only in certain situations) per broker in a scrip on a single exchange.

However, the dissenters are of the opinion that this limit in respect of individual stock futures is on the high side and, therefore, a risky proposition. One of them pointed out that arbitrary monetary limits on the size of individual trades or positions of the kind that existing in the carry forward market should be laid down.

The committee, headed by J. R. Varma, submitted its recommendations to the market watchdog. It said a lot has changed since the L. C. Gupta panel report of March 1998. One of them is the dematerialisation of shares, rolling settlement on a T+3 basis, client level and value at risk-based margins in the derivative and cash markets and the planned de-mutualisation of exchanges.

The committee agreed with the view of the Gupta panel that financial futures — equity, interest rate and currency — are inter-related because the markets are closely inter-linked. The Varma committee felt that there should be an attempt to develop an integrated market structure.

“We agree with this assessment. Currently, in the country, there is a vibrant currency forward market, and negligible activity in currency options and in interest-rate derivatives. These markets are non-transparent telephone markets,” the panel’s report states.

The committee added that institutions and technology to bring markets on to the transparent exchange platform are now available and should be used.

“This would bring the advantages of price-time priority, transparency, risk management at a central counter-party, nationwide reach to these important markets. Hence, SEBI and RBI should move on with trading in futures, options and swaps using a variety of underlying parameters such INR-USD rate, the short-end interest rate, the long-end interest rate and Mibor,” it said.

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