Introduction to Futures and Options Markets in India

1. Introduction to Futures and Options Markets in India MANISH BANSAL Jeetay Investments Email: manish.bansal@jeetay.com Phone: +91 98924 86751 www.jeetay.com To lead, one needs to be different and to be different, one needs to innovate strategically, on continuous basis.

2. Introduction

3. Great journey of Equity Derivatives Having started in 2000, journey on Equity Derivatives volume growth has been a spectacular one. Data Source - NSE

4. Great journey of Commodity Derivatives Commodity Derivatives, having started in 2003, have shown buoyancy and growth on continuous basis. Volume of other exchanges such as NCDED etc. are in addition to these nos. * For part year. Data Source - MCX

5. Great journey of Currency Derivatives * For part year. Having started in 2008, market has witnessed significant growth in Currency Derivatives volume. Data Source - NSE

6. Product Profile

7. Product Profile

8. Regulatory Snapshot • Regulatory goal is not to ensure that clients do not incur loss; But, to ensure that failure of any member does not affect integrity of the market. • Adequate risk containment systems in place to avoid failures: • Robust on-line Margining System (IM and MTM). • Exposure limits linked to Liquid Net-worth • Position limits linked to underlying size and OI - Market Level, Trading/Clearing Member Level & Client Level • Separation of clearing and trading activities. • Compulsory collection of margins from clients. • Continuous on-line monitoring of client level positions.

9. Exchange Traded Vs. OTC Products profile

10. OPPORTUNITIES TO CREATE VALUE THROUGH DERIVATIVES

11. Esops – An opportunity • Esops are essentially call options, issued to the employees. • Today, either employee can exercise those options after vesting or let them expire worthless. • Listing and trading of vested options would help the employees monetize their options without exercising them. • Opportunity: • Credit the vested options to employees in their Demat account. • List and trade the vested options on Stock Exchanges.

12. Rights – An opportunity • Rights are essentially call options, issued to the existing shareholders. • Today, shareholders exercise these options, let them expire worthless or surrender/transact them in OTC market. • Listing and trading of rights on Stock Exchanges would help the shareholders monetize their options much more efficiently (better liquidity, price discovery and ease) . • Opportunity: • Credit rights entitlements (REs) to shareholders in their Demat account. • List and trade the REs on Stock Exchanges.

13. Put options & buy back – An opportunity • Fixed price buy back of shares is essentially a put option, offered by companies to the existing shareholders. • Today, shareholders exercise these options or let them expire worthless. There is no market to transact these options. Based on exercise or no exercise, process results in non-homogeneous distribution of values among investors. • Listing and trading of these options on Stock Exchanges would help the shareholders monetize their option. • Opportunity: • Credit buy back entitlements (BEs) to shareholders in their Demat account. • List and trade the BEs on Stock Exchanges. • Companies may also write put warrants to the market participants (builds confidence + earns money).

14. Third party Warrants – An opportunity • A warrant is nothing but an option - may be call or put. • Institutions may write call options backed by the shares, they own (covered call). • Institutions may like to buy the put options on the shares, they own. • Institutions may also write long dated naked options. In this case, their positions may be margined like any other sold position (institution created product and not the exchange created product). • Warrants may be cash settled or physically settled warrants.

15. Derivatives Risk Management in OTC • OTM market has a lot to learn from the exchange environment on risk management. • More and more business to move to collateralized basis: • Margining to make customers much more disciplined • Margining avoids unhealthy competition among intermediaries • Margining results in reduction in credit risk and capital charge, which in turn reduces the threshold minimum return on the trades i.e. Pricing, hopefully, becomes sharper (better for customers) • Regulators may like to define minimum margin for all OTC trades • Opportunity for clearing corporations to take up/serve the OTC trades

16. Derivatives Risk Management in OTC • OTC market will eventually outsource credit risk management function to professional entities (clearing corporations): • Significant focus on monitoring and control of credit limits. • Efficient execution of collateral agreement in timely manner - MTM computation, collateral calls and squaring off of transactions • Clearing corporations to build competencies /gear up to handle complicated/structured transactions in the OTC world (beginning may happen with simple transactions). • CCIL has already taken several steps in this direction. Journey is still a very lengthy one.

17. Concluding remark Become a learning machine. Charlie Munger

18. Thank you Please feel free to reach me at Manish.bansal@jeetay.com +91 98924 86751