Everyone talks about derivatives these days. Derivative products have been around for a long time. Do you know derivatives first came about in Japanese rice markets?
Yes, as early as the 1650s, dealings resembling present day derivative market transactions were seen in rice markets in Osaka, Japan.
The first leap towards an organized derivatives market came in 1848, when the Chicago Board of Trade, the largest derivative exchange in the world, was established.
Today, equity and commodity derivative markets are rapidly gaining in size in India. In terms of popularity too, these markets are catching on like a forest fire. So, what are these markets all about? What are the products that they trade in? Why do people feel the need to trade in such products and what sort of traders benefit from such trades?
Do these markets hold scope for retail investors too? And if so, how exactly can you go about trading in them?
Derivatives markets broadly can be classified into two categories, those that are traded on the exchange and the those traded one to one or 'over the counter'. They are hence known as:
- Exchange Traded Derivatives
- OTC Derivatives (Over The Counter)
- OTC Equity Derivatives
Traditionally equity derivatives have a long history in India in the OTC market.
Options of various kinds (called Teji and Mandi and Fatak) in un-organized markets were traded as early as 1900 in Mumbai
The SCRA however banned all kind of options in 1956.
The prohibition on options in SCRA was removed in 1995. Foreign currency options in currency pairs other than Rupee were the first options permitted by RBI.
The Reserve Bank of India has permitted options, interest rate swaps, currency swaps and other risk reductions OTC derivative products.
Besides the Forward market in currencies has been a vibrant market in India for several decades.
The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset.
The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.
Derivative trading in India takes can place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a Self-Regulatory Organisation and Sebi acts as the oversight regulator. The clearing & settlement of all trades on the Derivative Exchange/Segment would have to be through a Clearing Corporation/House, which is independent in governance and membership from the Derivative Exchange/Segment.
With the amendment in the definition of 'securities' under SC(R)A (to include derivative contracts in the definition of securities), derivatives trading takes place under the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.
Dr. L.C Gupta Committee constituted by Sebi had laid down the regulatory framework for derivative trading in India. SEBI has also framed suggestive bye-law for Derivative Exchanges/Segments and their Clearing Corporation/House which lay's down the provisions for trading and settlement of derivative contracts.
The Rules, Bye-laws & Regulations of the Derivative Segment of the Exchanges and their Clearing Corporation/House have to be framed in line with the suggestive Bye-laws. Sebi has also laid the eligibility conditions for Derivative Exchange/Segment and its Clearing Corporation/House.
The eligibility conditions have been framed to ensure that Derivative Exchange/Segment & Clearing Corporation/House provide a transparent trading environment, safety & integrity and provide facilities for redressal of investor grievances.
