Derivatives Committee Report - Four Queries

L.C.Gupta’s Committee on Derivatives has recently submitted its final report to SEBI. It major recommendation is to introduce index futures in order to provide the facility for hedging against market risk in the most cost-efficient way. There are four pertinent questions that need to be publicly debated and the SEBI Board must seek satisfactory answers to these questions before accepting the recommendations: The four questions are: 1) Do index futures provide portfolio hedging? Or do they merely facilitate rebalancing/restructuring of portfolio mix at a cheaper and faster way? 2) How the introduction of index futures would affect the functioning of underlying cash markets in terms of volatility, liquidity etc.? 3) Is there sufficient demand and supply for trading in market risk to facilitate a competitive futures market? 4)Whether Indian capital markets are ready for index hedging? This paper is an attempt to examine critically the above four questions and outlines the investors immediate concerns which SEBI should attend to. The paper concludes that launch delay to insure that appropriate regulatory and institutional measures are in place are well worth the extra time. The haste may result into a major scandal that may undermine both the confidence in and acceptance of equity derivatives as well as the reputation of the entities involved in introducing these products.