Single stock features was the last type of exchange traded derivative to be approved by SEBI for trading in the Stock Exchanges. In fact the LC Gupta Committee, which submitted its report in March 1988 recommending the broad framework and regulatory measures for introduction of derivatives trading in Indian Stock Exchanges, was not much inclined towards individual stock futures given its limited popularity globally at that time. To quote from the committee's report:

"The fourth type, viz. individual stock futures, was favoured much less. It is pertinent to note that the U.S.A. does not permit individual stock futures. Only one or two countries in the world are known to have futures on individual stocks." (Paragraph 2.3)

Since the time of the LCGC report, the world has changed a great deal. Towards the end of 2000, the United States passed the Commodity Futures Modernization Act that demarcated the jurisdiction of the CFTC and the SEC and thereby removed the regulatory obstacle to single stock futures in that country. Single stock futures are expected to start trading in the United States later this year with the major derivatives exchanges coming together in a joint venture (One Chicago) for this purpose and Nasdaq teaming up with Liffe in a rival alliance. The list of countries trading single stock futures has expanded substantially during 2001 to include the United Kingdom, Greece, Mexico, Canada, Singapore, Hong Kong, Netherlands, Spain, Australia, Sweden, Finland, Denmark, Portugal, Hungary and South Africa. Liffe in London trades single stock futures on a range of stocks from around the world including the United States.

In India, the regulatory debate on single stock futures intensified when SEBI started work in early 2000 on adapting the carry-forward system to the rolling settlement regime. A dissent note in the report of the committee appointed for this purpose recommended that carry forward system should be swiftly replaced by single stock futures.

"The weekly carry forward system under rolling settlements is conceptually very close to a futures contract on individual stocks with five different futures contracts (with maturities of 1, 2, 3, 4, and 5 trading days) open for trading on any day. Moreover, the risk management of a proper futures contract is much better understood. As such, Dr. Patil and Prof. Varma recommend that the weekly carry forward product should swiftly migrate to a full fledged futures contract in individual stocks. When this is done, the product will cease to be regulated as a carry forward product and will be regulated exclusively as a derivatives contract."

The majority view at that time preferred the carry forward product on the ground that the market would find that product easier to understand and use. A year later when SEBI began working on moving the entire market to rolling settlement, the view on this had changed. The developments in the cash and derivative markets during 2000 led to a view that carry forward system may not be any easier to understand and use than a single stock future. The superior risk containment model for derivatives swayed the thinking of the Board. Carry-forward system was abolished in July 2001. Stock futures started trading in November 2001.

[Source: SEBI Advisory Committee on Derivatives Report on Development and Regulation of Derivative Markets in India ]

"There has been a steady increase in the volumes after starting trading in derivative products. For instance, average daily volumes in NSE derivative segment rose from Rs. 438 crore in October 2001 to Rs. 1073 crore in May 2002. Volumes in derivatives segment have grown phenomenally in the past few months, particularly after the introduction of stock futures and options. This spurt in activity can be attributed to stock futures that have aroused trading interest like no other derivative product."¹

"NSE accounts for over 97 percent of the activity in equity derivatives in India. Therefore, the status of equity derivatives markets in India can be measured in terms of the NSE's performance. BSE has lost the race to its erstwhile rival NSE in derivatives trading. In the derivative market, liquidity feeds on liquidity and with a tiny volume BSE can hardly catch up the race. Out of the total derivatives volume at NSE, individual stock futures account for almost 70 percent. Single stock call and put options constitute about 20 percent of the volumes. Index futures constitute about 10 percent and index options constitute about 2 percent of the volumes"¹

"Though stock futures were introduced after index futures, they lead the derivatives chart in terms of trading interest. Stock futures were very successful in India since their launch. There is a strong feeling among investors that stock futures in India will go a long way, and record new levels of success due to the increasing arbitrage opportunities among underlying cash market, stock options and stock futures. Individual stock futures constitute almost 70 percent of the volume of the equity derivatives. This is contrary to the performance of stock futures in other international stock markets. The reasons attributed are, "many individual participants with a taste for and experience in badla or carry-forward trading have seen the favorable properties of equity futures. This explains why single stock futures account for nearly 67 percent of the activity. Badla is primarily a single stock activity and India is experienced in analyzing and trading single stocks," says Gopalan Ramachandran, Chief Executive, Business Economics and Risk Management, Chennai. Specific to the Indian markets, one of the main reasons for the success of stock futures is that the market was in need of a carry forward mechanism after badla/ALBM system was banned by SEBI. In fact, the speculative interest, which was contributing nearly 85 percent of the volumes, plummeted after cessation of badla. So the large share of speculative interest in the market found its way in stock futures. Also trading on stock futures is safer when compared to the extinct badla system.

Further, the number of stock futures contracts being traded on the NSE is second only to Spain, beating even the London International Financial Futures and Options Exchange volumes. The other three derivative products - index options, stock options and index futures are lagging behind the trading volumes of stock futures".¹

"Single-stock futures are a way to reap the benefits of a stock's performance without actually owning the stock. Theoretically, they offer the benefits of ownership, of leveraging the stock or its underlying asset. But a similar opportunity is not available to the speculator-investor to sell options in the underlying scrip. As delivery of futures contracts is on a future date, the investor has to put up only the margin money. Hence, he can leverage on the margins to buy more units of the underlyingsecurity.²

"One of the advantages enjoyed by single-stock futures is that they are cheaper to trade and easier to use for hedging strategies than options. Cheaper, because margins in futures trading are lower than in options. But the valuation of futures contracts are not as complicated as that of options. Hence, small investors find them relatively easy to understand and use.²

[¹"Indian Derivatives Market : A perfect `Future(s)'?", Analyst, August 2002]

[²"Single Stock Features - Smart way to manage Risks" - Article by Mr.Anup Menon in the Business Line dated 29.10.2000 (before approval of trading in Stock Features by SEBI)]