ANMI Seeks To Assuage SEBI Worries Of Derivatives Trading Growth

Derivative brokers in India have submitted a report to the securities regulator SEBI stating that the high volume in derivatives sector was due to the National Stock Exchange (NSE) overstating volumes. The Association of National Exchanges Members of India (ANMI), a pan-India body of trading members was responding to a public consultation call sent out by SEBI with respect to formulating new rules for derivatives trading.

SEBI is considering introduction of new regulations in light of concerns that risky investment products could cause losses to lay investors as volumes surge. It is also looking to plug any inefficiencies or arbitrage opportunities currently present in the derivatives market.

In its discussion paper, SEBI had noted that NSE data showed a sharp increase of more than 10 times in the turnover for derivatives over that of the cash market. It also pointed out that the ratio of trades made in equity derivatives to that of equity cash market was up by nearly 15 times. SEBI questioned how far such volumes were comparable to global norms.

SEBI also highlighted the presence of a large number of active individual investors in the derivative market and expressed concern on their ability to handle the risk that arose from complex instruments. ANMI said in its response that the NSE was submitting options data using 'notional' turnover rather than premium turnover which was resulting in overstating the total business done in the futures and options segment.

It stated that the turnover in the equity derivatives segment was 15.59 times that of the cash market but when the ratio was taken using the premium segment then it is just 2.53 times the value which is within global norms. The body also noted that much of the OTC contracts occurring in the derivatives market globally were being executed outside the exchange platform which meant that they would be omitted from the exchange volumes data.

For the fiscal year 2016-17, the total turnover for the equity cash market in India was around Rs 60.5 lakh crore but the turnover for equity derivatives during the same period was a stunning Rs 944 lakh crore. The cash market has been growing at an annual compounded growth rate of around 11 percent since 2004-05 but the equity derivatives market has recorded a growth rate of over 35 percent.

Opposing any new restriction on trading, ANMI said that the average Indian investor and trader was more savvy and knowledgeable than investors from other countries. It said that derivatives trading in India was a low risk, low-to- medium return investment avenue offering returns similar to debt instruments to investors.

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