Introduction to Futures and Options Markets in India

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Introduction to Futures and Options Markets in
India

• MANISH BANSAL
• Jeetay Investments
• Email manish.bansal_at_jeetay.com
• Phone [phone]
• www.jeetay.com

To lead, one needs to be different and to be
different, one needs to innovate strategically,
on continuous basis.
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Introduction
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Great journey of Equity Derivatives
year Average Daily Turnover in Rs. crore
2012-13 113140.76
2011-12 125902.54
2010-11 115150.48
2009-10 72392.07
2008-09 45310.63
2007-08 52153.3
2006-07 29543
2005-06 19220
2004-05 10107
2003-04 8388
2002-03 1752
2001-02 410
2000-01 11
Having started in 2000, journey on Equity
Derivatives volume growth has been a spectacular
one.
Data Source - NSE
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Great journey of Commodity Derivatives
Year Turnover in Rs. Crore
2003 138
2004 93,432
2005 6,23,574
2006 20,25,664
2007 27,29,820
2008 42,84,653
2009 59,56,655
2010 86,96,869
2011 1,49,32,852
2012 56,98,492
Commodity Derivatives, having started in 2003,
have shown buoyancy and growth on continuous
basis. Volume of other exchanges such as NCDED
etc. are in addition to these nos.
For part year.
Data Source - MCX
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Great journey of Currency Derivatives
Year Turnover in Rs. Crore
2008-09 1,62,272
2009-10 17,82,608
2010-11 34,49,787
2011-12 46,74,989
2012-13 6,21,990
For part year.
Having started in 2008, market has witnessed
significant growth in Currency Derivatives volume.
Data Source - NSE
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Product Profile
Products Settlement type Tenor
Equity Derivatives Futures and options on indices (domestic and international) and stocks Cash settled Products Majorly 3 months products. Some products are available up to 5 yrs.
Commodity Derivatives Commodities Energy, Metals, Bullion, Oil and Seeds, Fiber, Weather etc. Compulsory delivery Sellers option and Intention matching Products Up to 1 yr. products
Foreign Exchange Four currency pairs USDINR, GBPINR, EURINR and JPYINR. Cash settled Products in Indian Rs. up to 1 yr. products
Interest Rates Notional bond Delivery based Products up to 1 yr. products
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Product Profile
MTM Circuit filters Position limits
Equity Derivatives Daily Only operational circuit filters Exist for market, members and clients
Commodity Derivatives Daily Only operational circuit filters Exist for members and clients
Foreign Exchange Daily Only operational circuit filters Exist for members and clients
Interest Rates Daily Only operational circuit filters Exist for members and clients
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Regulatory Snapshot

• Regulatory goal is not to ensure that clients do
  not incur loss But, to ensure that failure of
  any member does not affect integrity of the
  market.
• Adequate risk containment systems in place to
  avoid failures
• Robust on-line Margining System (IM and MTM).
• Exposure limits linked to Liquid Net-worth
• Position limits linked to underlying size and OI
  - Market Level, Trading/Clearing Member Level
  Client Level
• Separation of clearing and trading activities.
• Compulsory collection of margins from clients.
• Continuous on-line monitoring of client level
  positions.

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Exchange Traded Vs. OTC Products profile
Underlying Exchange Traded OTC
Equity Vibrant market 20-25 Bio average daily traded volume over last several months Dominant player is NSE. Standalone OTC Derivatives dont have legal support on enforceability. However, products like Equity Linked Debentures exist (access products). Outstanding - 5-7 Bio (Market estimates)
Currencies Vibrant market 10-15 Bio average daily traded volume over last several months Dominant players are NSE and MCX. Very vibrant market for variety of products and tenors. Corporates need to demonstrate the underlying transaction.
Commodities Vibrant market 15-20 Bio average daily traded volume over last several months Dominant player are MCX and NCDEX. Small market. Corporates allowed to hedge their risks. Dominant players are only offshore banks Citi, DB, MS, Goldman etc. Corporates need to demonstrate the underlying transaction.
Rates Products exist on exchanges, but no volumes. Very vibrant market for variety of products and tenors. Corporates need to demonstrate the underlying transaction.
Credit Not available CDS just launched (Dec. 2011). Progress to be seen.
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OPPORTUNITIES TO CREATE VALUE THROUGH DERIVATIVES
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Esops An opportunity

• Esops are essentially call options, issued to the
  employees.
• Today, either employee can exercise those options
  after vesting or let them expire worthless.
• Listing and trading of vested options would help
  the employees monetize their options without
  exercising them.
• Opportunity
• Credit the vested options to employees in their
  Demat account.
• List and trade the vested options on Stock
  Exchanges.

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Rights An opportunity

• Rights are essentially call options, issued to
  the existing shareholders.
• Today, shareholders exercise these options, let
  them expire worthless or surrender/transact them
  in OTC market.
• Listing and trading of rights on Stock Exchanges
  would help the shareholders monetize their
  options much more efficiently (better liquidity,
  price discovery and ease) .
• Opportunity
• Credit rights entitlements (REs) to shareholders
  in their Demat account.
• List and trade the REs on Stock Exchanges.

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Put options buy back An opportunity

• Fixed price buy back of shares is essentially a
  put option, offered by companies to the existing
  shareholders.
• Today, shareholders exercise these options or let
  them expire worthless. There is no market to
  transact these options. Based on exercise or no
  exercise, process results in non-homogeneous
  distribution of values among investors.
• Listing and trading of these options on Stock
  Exchanges would help the shareholders monetize
  their option.
• Opportunity
• Credit buy back entitlements (BEs) to
  shareholders in their Demat account.
• List and trade the BEs on Stock Exchanges.
• Companies may also write put warrants to the
  market participants (builds confidence earns
  money).

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Third party Warrants An opportunity

• A warrant is nothing but an option - may be call
  or put.
• Institutions may write call options backed by the
  shares, they own (covered call).
• Institutions may like to buy the put options on
  the shares, they own.
• Institutions may also write long dated naked
  options. In this case, their positions may be
  margined like any other sold position
  (institution created product and not the exchange
  created product).
• Warrants may be cash settled or physically
  settled warrants.

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Derivatives Risk Management in OTC

• OTM market has a lot to learn from the exchange
  environment on risk management.
• More and more business to move to collateralized
  basis
• Margining to make customers much more disciplined
• Margining avoids unhealthy competition among
  intermediaries
• Margining results in reduction in credit risk and
  capital charge, which in turn reduces the
  threshold minimum return on the trades i.e.
  Pricing, hopefully, becomes sharper (better for
  customers)
• Regulators may like to define minimum margin for
  all OTC trades
• Opportunity for clearing corporations to take
  up/serve the OTC trades

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Derivatives Risk Management in OTC

• OTC market will eventually outsource credit risk
  management function to professional entities
  (clearing corporations)
• Significant focus on monitoring and control of
  credit limits.
• Efficient execution of collateral agreement in
  timely manner - MTM computation, collateral calls
  and squaring off of transactions
• Clearing corporations to build competencies /gear
  up to handle complicated/structured transactions
  in the OTC world (beginning may happen with
  simple transactions).
• CCIL has already taken several steps in this
  direction. Journey is still a very lengthy one.

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Concluding remark

• Become a learning machine.
• Charlie Munger

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Thank you

• Please feel free to reach me at
• Manish.bansal_at_jeetay.com
• 91 98924 86751