Market regulator SEBI is now going to increase the scope of trading in the stock market. SEBI Chief Tuhin Kanta Pandey has recently clarified that to make the capital market stronger, it is necessary to focus on long-term Futures and Options (F&O) contracts. At present, the market is dominated by weekly or monthly i.e. short term deals. But, now SEBI wants that long-term derivative products should also be available to investors. Market experts have also welcomed this step.
Market experts say that the biggest hurdle in long-term derivatives is its existing structure. According to Kamlesh Shroff, national president of the Association of NSE Members of India (ANMI), long-dated derivatives will become popular only when the cost of trading comes down and large institutional investors show interest in it. Pension funds and asset managers in markets around the world use long-term contracts to protect their large portfolios. It should be seen as a tool to protect the portfolio from risk rather than short-term speculation.
A major reason for long-term derivatives not being very popular in India is the strict margin rules applicable here. Hedge fund manager Mayank Bansal explains that due to the way option Greeks work, long-term options have significantly lower returns than shorter-term options. On top of that, margins on long-term index derivatives in India are very high. For normal index contracts it is 9.3 percent, while for long term it has been kept at 17.7 percent. The exposure margin is also 5 percent, which disappoints investors.
Market makers play an important role in making any new product successful. Rajesh Baheti, MD, Cross Seas Capital, says that for the success of long-term products, such designated market makers are needed who can benefit from giving quotes (buying and selling) from both sides. This benefit should be more than the transaction cost and STT. BSE MD and CEO Sundararaman R also supports this step of SEBI. He believes that rationalizing the existing STT structure and margin rules will accelerate the adoption of these products.
Experts suggest that initially such contracts should be introduced only in index derivatives because they have less volatility, which reduces the risk of manipulation. Later, when liquidity increases, it can be implemented in selected shares. But, will long-term contracts also be able to bring the same volume as weekly expiry? Experts believe that despite low margins, long-term deals cannot compete with weekly or monthly contracts. In July, SEBI is also going to release its report on the losses incurred by retail investors in derivatives. Now the focus will be on how SEBI overcomes these market problems and makes long-term contracts successful.
