The progress made in the ushering of Derivatives Trading in our country is aptly described the following statement

"Since that time(mid Nineties), exchange-traded derivatives have progressed considerably. Starting from a climate of suspicion and ignorance, we are now a country with a thriving equity derivatives market, with policy makers seeking to develop similar markets in other areas.

"However, we are not yet a country which is fully utilising the markets and products currently available. Firms in India do not have positions in derivative markets that are commensurate with their size; farmers in India do not hedge away their price risk using these instruments; our financial institutions and banks have kept away from using derivatives despite the increasing levels of risk."

It is in this context that in the first half of the year 2002 the Advisory Group on Derivatives of SEBI considered certain important issues relating to the derivative markets including:

• Physical settlement of stock options and stock futures contracts.

• Review of the eligibility criteria of stocks on which derivative products are permitted.

• Use of sub-brokers in the derivative markets.

• Norms for use of derivatives by mutual funds.

The recommendations of the Advisory Committee on Derivatives on some of these issues were also placed before the SEBI Board in its meeting on June 24, 200. SEBI however desired further study and comprehensive recommendations for improvement in the Derivatives market based on a total review of all aspects of Derivatives Market in India including a review of the recommendations of the L. C. Gupta Committee (LCGC). SEBI pointed out that there were several other important issues like the issue of minimum contract size, the segregation of the cash and derivative segments of the exchange and the surveillance issues in the derivatives market

Four years have elapsed since the LCGC Report of March 1998. During this period there have been several significant changes in the structure of the Indian Capital Markets which include, dematerialisation of shares, rolling settlement on a T+3 basis, client level and Value at Risk (VaR) based margining in both the derivative and cash markets and proposed demutualization of Exchanges. Equity derivative markets have now been in existence for two years and the markets have grown in size and diversity of products. This therefore appears to be an appropriate time for a comprehensive review of the development and regulation of derivative markets.

The ADC undertook such a comprehensive study and submitted its final report in the month of September 2002. It submitted its recommendations on the following:

The ADC in its report reiterated the goals of regulation as earlier set out by LCGC in its report under Paragraph 3.1. The ADC endorsed these regulatory principles completely and based its recommendations also on these same principles. Its submitted its recommendations on the followings main heads:

• Derivative Products

• Risk Containment

• Market Structure and Governance

• Use of Derivatives by Mutual Fund, and

• SEBI Related Issues

The recommendation of the advisory committee were placed on the SEBI website for pubic comments. SEBI, after examining the public comments accepted the recommendations. The gist of the recommendations of the ADC and steps taken by SEBI to implement the same are discussed in the subsequent pages.