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Organisation of Derivatives Market in India

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Various models exist for the regulation of derivative products across the globe. In some countries, all financial markets including those for commodity derivatives and securities derivatives are organised under one regulator. Certain countries keep money market operations exclusively under Central Bank and all the other segments of financial markets under a separate regulator. Some countries have a very fragmented system of regulation with separate regulators for each class of product. In many jurisdictions, the market for non-standardised contracts or better known as over the counter market or negotiated market are not under any specific regulators.

Derivatives instruments in India are regulated by the Reserve Bank of India, Securities and Exchange Board of India (SEBI) and Forward Markets Commission (FMC). Subsequent to the passing of the Finance Act 2015, FMC would be merged with SEBI.

The framework for regulating derivative transactions is provided in the various Acts of Government of India such as Securities Contracts (Regulation) Act, 1956, Reserve Bank of India Act, 1934, Forward Contracts (Regulation) Act 1952 and related Rules, Regulations, Guidelines, Circulars etc. Of these the Forward Contracts Regulation Act or FCRA would be repealed following the merger of FMC with SEBI.

Exchange traded equity and commodity derivatives markets are regulated by Securities and Exchange Board of India (SEBI). Prior to the merging of FMC with SEBI, the Forward Markets Commission (FMC) regulated the exchange traded commodity derivatives market in India. Reserve Bank of India (RBI) as well as SEBI jointly regulates the exchange traded foreign currency and interest rate futures. The foreign currency, interest rate and credit derivatives traded in the over the counter (OTC) market is under the jurisdiction of RBI and is permitted as long as at least one of the parties in the transaction is regulated by RBI.

To understand the size of each segment, the turnover in various derivative contracts over the past three years across the segments is given below. As may be seen, the OTC turnover as a percentage of exchange traded securities derivatives turnover has decreased over the years.


Exchange traded securities derivatives turnover (in Rs. crore)

(based on notional value of the products)

Commodities derivatives  Turnover (in Rs. crore)

Estimated turnover in the OTC Markets# (in Rs Crore)

Year
Equity Derivatives
Currency Derivatives
Interest Rate Futures
2009-10
17,663,665
45,397
2,973
77,64,754.05
30,22,101
2010-11
29,248,221
8,406,355
62
11,948,942.35
4,886,816
2011-12
31,349,732
9,897,286
3,959*
18,126,103.78
5,123,763
% increase in 3 years
77.48%
21701.63%
33.17%
133.44%
69.54%


*Increased IRF turnover during 2011-12 is on account of introduction of 91 day T-Bill futures in July 2011.# indicates turnover in the Interest Rate Swaps (IRS) traded in OTC market; However, this excludes Credit Default Swaps on corporate bonds which were introduced only in October 2011. Source: RBI, SEBI and FMC

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