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Diamond Derivatives: Lessons from Indian Markets


Market players to provide liquidity ... Provides arbitrage opportunities if listed ... or reliability of any information contained herein or otherwise provided. ... – PowerPoint PPT presentation

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Title: Diamond Derivatives: Lessons from Indian Markets

Diamond Derivatives Lessons from Indian Markets
June 2007
  • Economic reforms since 1991-92
  • Foreign Exchange
  • Current account convertibility
  • Active derivatives market
  • Equity Market Reforms
  • Electronic trading platform
  • Active derivatives market
  • Fixed Income Market
  • Limited trading
  • Commodities Market
  • Active derivatives market

Structure of Financial Markets
Equity markets
Securities Exchange Board of India (SEBI)
NSE/ BSE and other exchanges in India
  • Presence of electronic dealing platforms
  • Dematerialized trading for cash markets
  • Limits on Foreign Institutional Investors relaxed
    over the period of time
  • Futures and Options Market introduced during
    1999-00 with daily settlement and margin

Equity market Cash v/s derivative segments
USD billion
More than proportionate increase in annual FO
segment turnover vis a vis the Cash segment
1 USD INR 40.75
Currency markets
Reserve Bank of India (RBI) through FEMA and
Exchange Control guidelines
  • Currency markets controlled by RBI till
    introduction of the Liberalized Exchange Rate
    Management System in 1992
  • Introduction of plain vanilla currency options by
    RBI in 2000-01
  • Structured swaps and exotic options
  • Active Spot/Forward markets in USD/INR

Currency market turnover
USD billion
Source Reserve Bank of India
Debt markets
Reserve Bank of India (RBI) / FIMMDA guidelines
  • Sovereign debt volume dependent on borrowing
    program of the Government of India (GOI)
  • Active OTC - INR swap markets
  • Less active non government bonds
  • Interest rate futures less active

GOI securities - volumes
Source CCIL
Commodity markets
Forward Market Commission
  • Fragmented commodity trading since 1875
  • New exchanges since 2004 Currently 3 active
  • Over 60 commodities listed, however liquidity in
    less than 10 commodities
  • Turnover doubles in 2007 to USD 1000 bn compared
    to 2006

Commodity Futures Daily Volumes
Source MCX, June 2006
Key observations
  • Equity and commodity derivatives markets
  • Very high volumes and high growth p.a
  • Active retail and institutional participation
  • Hedgers and traders provide liquidity
  • Number of participants very high
  • Fixed Income and Foreign Exchange markets
  • Largely institutional players
  • Reach restricted
  • Regulatory influence

Key Learning
  • High price volatility liquidity
  • In commodities with international linkages and
    multiple listings
  • Derivative market trading volumes are 15 times
    the value of cash markets (Eg Gold)
  • Diamond futures volumes to be around USD
    150200bn annually by this estimate
  • Traders Speculators in Stock Commodity
    markets similar in profile to Indian diamond

Diamond Derivatives Building Blocks
  • Bench mark reference
  • Need for active cash market
  • Standardised commodity
  • Market makers
  • Low bid offer high liquidity
  • High volumes
  • Price discovery
  • Hedgers
  • Traders
  • Speculators
  • Investors

Diamond Derivatives Building Blocks
  • Transparency Price discovery
  • Pros and cons for Industry
  • Governance
  • Arms length and insider information
  • Exchange trading of commodities
  • Elimination of credit risk to participants
  • Market information for price volatility
  • Dissemination of information to market players

Diamond Industry in India
  • High importance to Indian Economy
  • Contributes over 15 exports (USD 12 billion)
    6 imports (USD 9 billion)
  • India accounts for over 90 volumes 55 value
    in cutting polishing of diamonds
  • Increasing trend in retail appetite for diamond
  • High GDP growth
  • Higher net disposable income
  • Continued Government support to promote this

Diamond Derivatives Discussion
  • Should Diamonds be listed in India?
  • Pros
  • Natural linkages with the industry
  • Market players to provide liquidity
  • Commodity Exchanges and Electronic trading
    platforms available
  • Provides arbitrage opportunities if listed else
    where internationally
  • Cons
  • Entry restrictions for foreign players
  • Initial regulatory interference

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