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SEBI clears derivative trading

The Securities and Exchange Board of India has decided to introduce derivatives trading in a phased manner.

Accepting the L C Gupta Committee recommendations with some modifications, a SEBI board meeting on Monday decided that index-based futures will be introduced in the first phase.

As for the other derivative instruments like stock index options, futures/ options on individual stocks, interest rate futures or currency futures, no schedule has been fixed. ''These instruments will introduced depending on the experience and comfort level,” said SEBI chairman D R Mehta.

Even in the index-based futures, the market regulator has decided to limit the outstanding exposure of a derivative trader to 20 times his net worth. No such limit was prescribed in the Gupta report.

The existing stock exchanges have been permitted to trade in derivatives, provided at least 50 members of the exchange concerned opt for the trade. The exchanges must also fulfil certain other eligibility criteria like adequate infrastructure facilities, online trading and a surveillance system.

The regulatory authority has also slapped stipulations on the volume of trade, though the Gupta committee did not recommend any such measures. The minimum contract value for derivative trade has been fixed at Rs 100,000. This will apply to both institutions and individuals. The idea is to keep out very small and vulnerable players, Mehta said.

The SEBI also insists that a separate governing council should be set up for the trade, with the trading/ clearing members and the general public getting 40 and 60 per cent representation respectively. The criteria for selecting such members is to be worked out later.

Before the derivatives trade is kicked off, the Securities Contracts (Regulation) Act has to be amended, declaring derivative contracts based on index of prices of securities and other derivative contracts as securities.

A recommendation in this regard has already been made to the Bharatiya Janata Party-led coalition government.

As for the mutual funds, the regulatory body has said that they would have to make necessary disclosures in their offer documents if they opt to trade in derivatives. For the existing schemes, they would require the approval of their unit-holders.

The SEBI constituted the Gupta Committee on November 18, 1996, to develop appropriate regulatory framework for derivative trading. The committee looked at financial derivatives in general and equity derivatives in particular.