Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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.


One response to “New Derivative Products in India

  1. Armando June 17, 2013 at 7:08 am

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    It’s triggered by the sincerness displayed in the post I read. And on this post New Derivative Products in India | Prof. Jayanth R. Varma’s Financial Markets Blog.
    I was moved enough to leave a thought 🙂 I actually do have some questions for you if it’s okay. Could it be simply me or does it give the impression like some of the comments look like they are left by brain dead visitors? 😛 And, if you are posting at other places, I’d like to keep up with you.
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