Page 207 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes The L. C. Gupta Committee had conducted a wide market survey with contact of several entities
relevant to derivatives trading like brokers, mutual funds, banks/FIs, FIIs and merchant banks.
The Committee observation was that there is a widespread recognition of the need for derivatives
products including Equity, Interest Rate and Currency derivatives products. However, Stock
Index Futures is the most preferred product followed by stock index options. Options on
individual stocks are the third in the order of preference. The participants took interviews,
mostly stated that their objective in derivative trading would be hedging, but there were also a
few interested in derivatives dealing for speculation or dealing. The Committee believes that
regulation should be designed to achieve specific, well-defined goals. It is inclined towards
positive regulation designed to encourage healthy activity and behaviour. Let us have a brief
view of the important recommendations made by the Dr. L. C. Gupta Committee on the
introduction of derivatives markets in India. These are as under:
1. The Committee is strongly of the view that there is urgent need of introducing of financial
derivatives to facilitate market development and hedging in a most cost-efficient way
against market risk by the participants such as mutual funds and other investment
institutions.
2. There is need for equity derivatives, interest rate derivatives and currency derivatives.
3. Futures trading through derivatives should be introduced in phased manner starting with
stock index futures, which will be followed by options on index and later options on
stocks. It will enhance the efficiency and liquidity of cash markets in equities through
arbitrage process.
4. There should be two-level regulation (regulatory framework for derivatives trading), i.e.,
exchange level and SEBI level. Further, there must be considerable emphasis on self
regulatory competence of derivative exchange under the overall supervision and guidance
of SEBI.
5. The derivative trading should be initiated on a separate segment of existing stock exchanges
having an independent governing council. The number of the trading members will be
limited to 40 percent of the total number. The Chairman of the governing council will not
b trade on any of the stock exchanges.

6. The settlement of derivatives will be through an independent clearing Corporation/
Clearing house, which will become counterparty for all trades or alternatively guarantees
the settlement of all trades. The clearing corporation will have adequate risk containment
measures collect margins through EFT.
7. The derivatives exchange will have on-line-trading and adequate surveillance systems. It
will disseminate trade and price information on real time basis through two information
networks. It should inspect 100 percent of members every year.

8. There will be complete segregation of client money at the level of trading/clearing even
at the level of clearing corporation.
9. The trading and clearing member will have stringent eligibility conditions. At least two
persons should have passed the certification programme approved by the SEBI.
10. The clearing members should deposit minimum ` 50 lakh with clearing corporation and
should have a net worth of ` 3 crore.
11. Removal of the regulatory prohibition on the use of derivatives by mutual funds while
making the trustees responsible to restrict the use of derivatives by mutual funds only to
hedging and portfolio balancing and not for specification.

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