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Derivatives Trading in India Commodity Derivative Markets have been functioning in India since very long in agricultural products like cotton, wheat, pepper etc. and in precious metals like gold, silver etc. The Forward Contracts (Regulation) Act, 1952. provided the basis for forward trading in commodities. India prohibited futures trading in gold in 1962 after the war with China and in most other commodities in the 1970s, when domestic production of farm products was not enough to meet local demand. In the 1980s, it began re-introducing futures in select farm products. In the first instance futures trading in around 40 commodities, including oils and oilseeds, sugar and turmeric were permitted. Futures in several commodities, such as grains and bullion, are however banned. Recently during February 2003, the Government lifted the ban on futures trading in 54 more commodities including rice, wheat, bullion and other metals, to enable traders manage risk, as the prices of these commodities fluctuate wildly. India also has a strong dollar-rupee forward market with contracts being traded for one, two … six-month, one-year expiration. Indian users of hedging services are also allowed to buy derivatives involving other currencies on foreign markets. But other equity and currency derivatives were unknown in India till the year Nineties. In fact derivatives trading in securities and currencies were unenforceable due to the provision in Indian Contract Act, 1872, as Section 30 of the Act, renders all wagering contracts as unenforceable and void. Further a notification was also issued under Securities Contracts Regulation Act,1956, banning all forward trading including forward trading in commodities. The said notification since stands revoked in the year 2000. Further the definition of Securities in Securities Contract Regulation Act, 1956 under Sec.2 did not include derivative products in the definition of securities and Sec.20 of the act specifically prohibited all trading in options from the commencement of the act. Consequent on the recommendations of LC Gupta Committee at the initiatives taken by SEBI the amendments were introduced as per Securities Laws ( Second Amendment ) Act,1999 introduced on 16 December 1999. The prohibition in trading in options in securities was lifted earlier in the year 1995 the Securities Laws (Amendment)Act, 1995. Section 18-A was introduced through the amendment of the year 1999 making exchange traded derivatives legal. While the introduction of Section 18A of Securities Contract (Regulation) Act, 1956 has resolved the legality problem as far as exchange-traded derivatives are concerned, the issue is still open for OTC derivatives. The definition of derivative as contained in Section 2 (aa) of SCRA, 1956 is not wide enough to cover OTC derivatives like Interest Rate Swaps and Forward Rate Agreements, and it would render all OTC contracts void ab initio under Section 18A, which states:
Similarly in respect of commodity trading Options in goods are presently prohibited under Section 19 of the Forward Contracts (Regulation) Act, 1952. Hence Contracts in commodities futures through commodity exchanges are presently permitted in India. As a result the following types of Derivatives Products are legally permitted to be traded in Indian Markets
The different derivatives products traded in the Indian Markets are as under:
Calendar of Introduction of Derivatives Products in Indian Financial Markets
November 2002 - RBI Working Group on Rupee Derivatives Derivatives in India: A Chronology
Product Specifications BSE-30 Sensex Futures
Product Specifications S&P CNX Nifty Futures
Membership
Membership Criteria - National Stock Exchange (NSE) Clearing Member (CM)
In addition for every TM he wishes to clear for the CM has to deposit Rs. 10 lakh. Trading Member (TM)
Membership Criteria - Mumbai Stock Exchange (BSE) Clearing Member (CM)
In addition for every TM he wishes to clear for the CM has to deposit Rs. 10 lakh with the following break-up.
Trading Member (TM)
The Non-refundable fees paid by the members is exclusive and will be a total of Rs.8 lakhs if the member has both Clearing and Trading rights. Trading Systems NSE's Trading system for it's futures and options segment is called NEAT F&O. It is based on the NEAT system for the cash segment. BSE's trading system for its derivatives segment is called DTSS. It is built on a platform different from the BOLT system though most of the features are common. Settlement and Risk Management systems Systems for settlement and risk management are required to satisfy the conditions specified by the L.C. Gupta Committee and the J.R. Verma committee. These include upfront margins, daily settlement, online surveillance and position monitoring and risk management using the Value-at-Risk concept. All these are discussed in detail in subsequent pages. Certification Programmes The NSE certification programme is called NCFM (NSE's Certification in Financial Markets). NSE has outsourced training for this to various institutes around the country. The BSE certification programme is called BCDE (BSE's Certification for the Derivatives Exchange). BSE conducts it's own training run by it's training institute. Both these programmes are approved by SEBI. | ||||||||||||||||||||||||
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