Sebi should liberalize trade in equity derivatives
It is notable that the capital markets regulator, Sebi, has considerably eased trading norms for equity derivative contracts. The combined futures and options position limit in equity derivatives has been raised to 20 per cent of the applicable market wide position limit. It may boost trading and attendant price discovery in stocks and indices. Yet the domestic market for equity derivatives remains much constrained. As compared to those in the region, there remain onerous position limits, high margin requirements, and other rigidities such as capital controls and high transactions taxes that constrain the equity derivatives market here.
The result is the lack of a vibrant domestic market and loss of international competitiveness as well. Note that the open interest in Nifty futures in Singapore can often be twice that at the NSE. A thriving market for futures and options contracts on stocks would lead to better managing of market risks. For example, while unit-linked insurance plans do form a significant portfolio of insurance companies, the latter do not quite trade in equity derivatives as there is no operational clarity. There is also very low participation of equity mutual funds in the equity derivatives market, and banks and foreign banks as also foreign intermediaries in India are simply not permitted to participate.
The Securities Transactions Tax and stamp duty only add to transactions costs. The STT needs to be removed; it is not as per global practice. And stamp duty need not be applicable to cash-settled products such as index derivatives, as there is no delivery of the underlying. Further, trading and clearing rules must be nationality-neutral and participant-neutral in the equity derivatives market. For make in India, we need trade and transact in India, too.
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