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Unit 11: Introduction to Derivatives

Naik, 1968, Chairman, Forwards Markets Commission, India, 1963-68). A clearinghouse for Notes
clearing and settlement of these trades was set up in 1918. In oilseeds, a futures market was
established in 1900. Wheat futures market began in Hapur in 1913. Futures market in raw jute
was set up in Calcutta in 1912. Bullion futures market was set up in Mumbai in 1920.
History and existence of markets along with setting up of new markets prove that the concept of
derivatives is not alien to India. In commodity markets, there is no resistance from the users or
market participants to trade in commodity futures or foreign exchange markets. The Government
of India has also been facilitating the setting up and operations of these markets in India by
providing approvals and defining appropriate regulatory frameworks for their operations.

Approval for new exchanges in last six months by the Government of India also indicates that
the Government of India does not consider this type of trading to be harmful, albeit within
proper regulatory framework.
This amply proves that the concept of options and futures has been well-ingrained in the Indian
equities market for a long time and is not alien as it is made out to be. Even today, complex
strategies of options are being traded in many exchanges which are called teji-mandi, jota-
phatak, bhav-bhav at different places in India. (Vohra and Bagari, 1998) In that sense, the derivatives
are not new to India and are also currently prevalent in various markets including equities
markets.

11.4.2 The Existing Capital Market is Safer than Derivatives

The world over, the spot markets in equities are operated on a principle of rolling settlement. In
this kind of trading, if you trade on a particular day (T), you have to settle these trades on the
third working day from the date of trading (T + 3).

Futures market allow you to trade for a period of say 1 month or 3 months and allow you to net
the transaction taken place during the period for the settlement at the end of the period.

Notes In India, most of the stock exchanges allow the participants to trade during one-
week period for settlement in the following week.
The trades are netted for the settlement for the entire one-week period. In that sense, the Indian
markets are already operating the futures style settlement rather than cash markets prevalent
internationally.
In this system, additionally, many exchanges also allow the forward trading called badla in
Gujarati and Contango in English, which was prevalent in the UK. This system is prevalent
currently in France in their monthly settlement markets. It allowed one to even further increase
the time to settle for almost 3 months under the earlier regulations. This way, a curious mix of
futures style settlement with facility to carry the settlement obligations forward creates
discrepancies.

Task Pen down your views on portfolio rebalancing.
The more efficient way from the regulatory perspective will be to separate out the derivatives
from the cash market i.e. introduce rolling settlement in all exchanges and at the same time
allow futures and options to trade. This way, the regulators will also be able to regulate both the
markets easily and it will provide more flexibility to the market participants.

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