The first meeting of the Advisory Committee on Derivatives was convened today. 

The Committee felt that various barriers in the market for different category of participants should be streamlined and standardised to the extent possible so to ensure equal access to all categories of investors. Further for the purpose of efficient price convergence between the futures and cash market the Institutions should be permitted to create segregated short selling account with a limit on the overall exposure, capped to the exposure in the derivative markets. The committee also proposed that Banks should also be permitted to participate in the derivative markets.

In line with the concept of equal access to all investors, the committee recommended that FII’s should be permitted to trade in all SEBI approved derivative contracts. Presently, RBI permits FII’s to deal in Index Futures Contracts only. Further the exposure limits that are currently linked to the exposure in the cash segment need to be rationalised. 

In order to encourage larger participation of the existing broker member in the derivatives market, the Committee proposed that a new category of clearing members may be incorporated in the regulation with lower balance sheet networth requirement without any change in the liquid networth requirement. However, such members shall not be permitted to clear the trades of other trading members.

The Committee felt that clarity was needed in the SEBI guidelines with respect to the participation of Mutual Funds in the derivative market. SEBI would therefore issue a detailed clarification with regards to the existing provisions so as to include permission to write covered options. 

The committee also felt that the physical settlement of stock option contracts may be introduced at an early date so as to provide inter linkages in the prices of the stock in the cash and the derivative markets. For this purpose a sub-group comprising SEBI, BSE & NSE was constituted to work out the modalities / procedures for the settlement of exercise and assignment. 

Further, on the issue of fungibility of collateral deposited by members between the cash and derivative segment the committee asked NSE & BSE to legally examine all the issues linked to the subject and to submit a legal opinion to SEBI.

The committee felt that the market is at a nascent stage and the introduction of options on more stocks may adversely affect the liquidity in the existing stock option contracts. The committee therefore decided that increase in number of option contracts should be after the market attains a level of maturity. 

With respect to introduction of individual stock futures, there was a general consensus among the committee participants that the individual stock futures was a logical extension of the current sequence of products available in the derivative market. This was also recommended earlier by the Group headed by Prof. J.R Varma on deferral products under rolling settlement. The committee was also of the view that the stock futures serve an economic purpose. The committee felt that stock futures should be introduced early. The committee also felt that a streamlined stock lending/borrowing system and segregated short selling facility to institutional participants would facilitate stock futures.

The Committee was also of the view that Margin Trading should be introduced in the stock market. There was also a suggestion that bank funds could be channeled for this purpose through the stock exchange clearing house / corporations. 

The committee endorsed the investor education program proposed by SEBI and Exchanges. The committee also endorsed the formation of the sub-group for deciding on adjustment of option contract at the time of corporate actions. 

The policy recommendations of the committee like the introduction of stock futures would be taken up to the SEBI Board before implementation.