SEBI okays derivative trade in global indices

Mumbai: After a long wait,  Indian investors can start trading in large indices of 24 exchanges worldwide within a month, following market regulator SEBI's decision to allow trade in derivatives contracts in global indices. The indices include those in the US, Europe and Asia.

There are, of course, caveats. The market regulator said in a circular on Tuesday that stock exchanges would have to submit their application along with the risk management framework for approval before the regulatory bodies of the countries concerned.

Stock exchanges are expected to cash in on this opportunity to launch futures contracts, as they have been trying to increase their market share by selling global products to Indian investors, say brokers.

The National Stock Exchange (NSE) has entered into cross-listing agreements with Chicago Mercantile Exchange (CME) and the London Stock Exchange (LSE). As part of the agreement with CME, the NSE has exclusive rights for trading in the S&P 500 and the Dow Jones Industrial Average rupee-denominated futures contracts for trading in India.

''The SEBI move is positive as it will allow Indian investors to diversify their allocation across global asset classes in a controlled environment,'' said Ashish Kumar Chauhan, deputy chief executive officer, Bombay Stock Exchange. ''The advantage of this move is that it can be traded and settled in rupee terms,'' he said.

The exchanges could introduce derivatives in the indices traded on Chicago Board Options Exchange, CME Group, Nasdaq OMX PHLX, and the Singapore Exchange, among others. The overseas index should have a minimum market capitalisation (m-cap) of $100 billion, and there should be at least 10 stocks in the index, the directive says.

Further, no single stock should have more than 25 per cent of the weight, computed in terms of free float m-cap, the circular stated. Also, in terms of trading volumes (number of contracts), derivatives on that index should figure among the top 15 derivatives index globally. It also stated that if the stock index failed to meet any of the above criteria for three months consecutively, no fresh contract will be introduced on that index.

The position limits as well as the disclosure requirements for clients whose position exceed 15 per cent of the open interest of the market as applicable to domestic stock index derivatives shall be applicable on foreign stock indices.