New Derivative Products in India

Yesterday, the Financial Express published an interview with me on the proposal by SEBI earlier this month to launch new derivative products. I made two main points:

• The Indian market certainly needs new derivatives products. Fixed income derivatives are the largest class of derivatives in the global derivatives exchanges and these products do not exist in Indian exchanges. Interest rate risk is the single biggest risk today both for households and for businesses and there is no exchange traded mechanism to deal with these risks. This is a very big problem for households who do not even have access to the inter bank OTC market for interest rate derivatives. With the large amount of floating rate home loans that households have on the liabilities side of their balance sheet and the large amount of fixed rate tax savings instruments that they have on the assets side, there is a clear economic need for accessible hedging mechanisms for households to cope with the huge interest rate risk that they are carrying. Similarly, with the $200,000 window for investments outside India, households will have a growing currency risk on their investment portfolio and there is a clear need for exchange traded hedging mechanisms. The existing OTC market provides risk management tools to business and denies them to households and this situation cannot be allowed to continue.
• The time has come for the regulator to move away from micro managing the design of specific derivative products and establish broad principles instead. Any product which meets minimum standards in terms of economic need and safeguards against market manipulation should be permitted. Competition in the marketplace should decide which products succeed and which fail. Regulators should stop pretending that they are wiser than the Markets.

Posted at 5:06 pm IST on Sat, 24 Nov 2007         permanent link

Categories: derivatives, regulation

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