The LCGC very rightly emphasised the need for SEBI to build competencies in the area of derivatives:
"SEBI should immediately create a special Derivatives Cell because derivatives demand special knowledge. It should encourage its staff members to undergo training in derivatives and also recruit some specialised personnel. A Derivatives Advisory Council may also be created to tap the outside expertise for independent advice on many problems which are bound to arise from time to time in regard to derivatives." (Paragraph 4.11(b)
The Advisory Committee on Derivatives has been in existence for a year now. Prior to that there was a Technical Group on Derivatives for about a year. Most of the ground work on derivatives has been completed in these two years. Going forward, two sets of issues will arise:
Operational issues will continue to come up on various aspects of the derivatives markets. The ACD is of the view that SEBI must now gear up to handle this with in-house staff. The SEBI Derivatives Cell has been in existence for several years now and has acquired significant expertise in the area. While LCGC felt the need for external advice to handle the "many problems which are bound to arise from time to time in regard to derivatives", the ACD thinks that the derivatives cell is now ready to accept this additional responsibility. If necessary, the Derivatives Cell can be further strengthened through new recruitment and skills upgradation.
A number of issues will arise regarding the interrelationship between the cash and derivatives markets particularly in the areas of risk containment and surveillance. Surveillance issues must largely be an in-house function and this report has recommended unified surveillance of the two markets (see 5.4 above). In the area of risk management, there is a need to create mechanisms that can facilitate an integrated view of risk management in both cash and derivative markets simultaneously
Accordingly, the ACD recommends:
Strengthening of the Derivative Cell both quantitatively and qualitatively to shoulder most of the responsibility for operational issues regarding the derivatives market.
Strengthened unified surveillance of the cash and derivative markets as described earlier.
Develop mechanisms to facilitate an integrated view of risk management in both cash and derivative markets simultaneously.
SEBI and RBI
The Committee recommends that SEBI and RBI should work together on moving towards exchange traded derivatives in the area of interest rates and currencies as outlined already.
Action taken by SEBI on the recommendations of ADC given in the next page.
[Note: Recommendations of the ADC on the subject "Use of Derivatives by Mutual Funds" are included under te module dealing with Mutual Funds]
