GN Bajpai: Cooling derivatives without distorting the market is no easy task
Subscribe to enjoy similar stories. The explosion of volumes in the Indian derivatives’ market—daily swaps, in particular—and the widespread participation of retail investors has generated deep concern among regulators and policymakers. As Warren Buffett famously said, “Derivatives are financial weapons of mass destruction." A consultation paper published by the Securities and Exchange Board of India (Sebi) noted that in 2023-24, an average 85 out of 100 individuals trading in index futures lost money.
The market regulator’s solicitude seems to be the interest taken by common investors in derivatives, apart from the market’s efficacy and rhythm. Accordingly, Sebi has promulgated numerous measures to cool this market down. Derivatives are a risk-management financial instrument.
On one side of a trade is a risk-hedger, and on the other, a risk-taker. The latter is a kind of speculator who consciously bets on possibilities. Incidentally, derivatives also help in sharpening how the stock market prices stocks.
Broadly, there are three kinds of threats to the tranquillity of a securities market: structural risks, systemic risks and operational risks. Aberrations in trading, sudden and disproportionate surges in volume, misdemeanours and major market misconduct must be examined from all three angles. Often, only operational risks are in focus, with the low-lying systemic risk of ‘a banker not honouring a banker’s cheque’ overlooked.
This contributed substantially to the global meltdown of 2007-08. In India, an upsurge in derivative volumes, high interest in primary share issues (even by small and medium enterprises or SMEs) and widespread retail participation all warrant scrutiny from all three angles. Shallow secondary
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