Indian Derivatives Market

• Derivatives are financial contracts whose value is derived from an underlying asset, such as stocks, commodities, currencies, or interest rates.

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Purpose:

• Hedging: Mitigating potential losses in investments.
• Speculation: Seeking profits from market movements.
• Arbitrage: Exploiting price differences across markets.​

Types of Derivative Contracts

Futures Contracts

• Description: Standardized agreements to buy or sell an asset at a predetermined price on a specified future date.
• Trading Venue: Exchanges like NSE and BSE.
  • Example: Nifty 50 futures.​

Options Contracts

• Description: Contracts that provide the right, but not the obligation, to buy (call) or sell (put) an asset at a set price before a certain date.
  • Example: Stock options on companies like Reliance or Infosys.​

Forwards Contracts

• Description: Customized contracts between two parties to buy or sell an asset at a future date for a price agreed upon today.
• Trading Venue: Over-the-counter (OTC).
  • Example: Forward contracts in foreign exchange.​

Swaps

• Description: Contracts where two parties exchange cash flows or other financial instruments.
• Types:
  • Interest Rate Swaps: Exchanging fixed interest rate payments for floating rate ones.
  • Currency Swaps: Exchanging cash flows in different currencies.
  • Trading Venue: Primarily OTC.​

Regulatory Framework in India

• Securities Contracts (Regulation) Act, 1956 (SCRA): Regulates trading in securities to prevent undesirable transactions.​
• Securities and Exchange Board of India (SEBI) Act, 1992: Establishes SEBI as the regulator for the securities market.​
• Commodity Derivatives Market Regulation:
  • Finance Act, 2015: Transferred regulation of commodity derivatives from the Forward Contracts (Regulation) Act to SEBI.
  • Commodity Derivatives Market Regulation Department (CDMRD): Oversees commodity derivatives markets, including exchanges like MCX and NCDEX. ​

Market Infrastructure and Exchanges

National Stock Exchange (NSE):

• Established: 1992
• Commenced Operations: 1994
• Market Position: World's largest derivatives exchange by the number of contracts traded.
• Products: Equity derivatives, currency derivatives, commodity derivatives.
• Indices: Nifty 50, Nifty Bank, Nifty IT.​

Bombay Stock Exchange (BSE):

• Established: 1975
• Derivatives Segment: Introduced in 2000.
• Products: Equity derivatives, currency derivatives.
• Recent Developments: Proposed changes to derivatives expiry schedule to enhance market share. ​

Multi Commodity Exchange (MCX):

• Established: 2003
• Products: Commodity derivatives in metals, energy, and agricultural commodities.
• Market Position: India's largest commodity derivatives exchange. ​

Market Participants

• Hedgers: Entities seeking to mitigate risk.
• Speculators: Traders aiming to profit from market movements.
• Arbitrageurs: Participants exploiting price discrepancies across markets.
• Retail Investors: Individual traders engaging in derivatives trading.​

Recent Developments and Challenges

• Retail Participation: Over 30% of derivatives market volume is attributed to retail investors. ​
• Regulatory Measures:
  • Increased Margin Requirements: To curb excessive speculation.
  • Expiry Day Reforms: Proposal to standardize expiry days to Tuesday and Thursday to enhance liquidity and market efficiency. ​
• Market Risks:
  • High Leverage: Increased risk of significant losses.
  • Market Manipulation: Instances of 'pump and dump' schemes.

Importance of Derivatives