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Experts mull making derivative trading safe

Adequate internal controls and margining system coupled with effective risk management would make trading in derivatives far more safer than equity cash markets.

This was the consensus among speakers on the concluding day of the second annual Indian Derivatives Convention organised by the Invest India Economic Foundation in Bombay.

Speaking on the presentation, ''Future Clearing Corporation'', the National Stock Exchange Deputy Managing Director Ravi Narain said that once derivatives start in the capital market, distinction between the clearing member and trading member of the stock exchange would go and every trading member can become a clearing member.

On the NSE's risk management plans for launching index futures, he said that there would be segregation between proprietary and client trades, initial / upfront margin using value at risk and daily mark-to-market margin. ''Much of the principles required for derivatives should have been there for the cash market,'' he averred.

The Bombay Stock Exchange Executive Director R C Mathur said that failures in the derivative markets occured not due to laxity of regulators, but because the internal control meant to keep a check on trades failed.

Mathur added that though external regulations for the derivatives market may be in place, unchecked operations due to lack of internal controls could pose a serious threat.

In this regard, he stressed on the need for effective risk management.

Managing Director of ABN-Amro Securities Vishnu Deuskar underlined on the importance for firms to adhere to both Indian and internationally accepted documentation norms to avoid risk in transactions.

On the over-the-counter derivative market, he felt that traders should avoid dealing with parties having a high credit risk. He said that the Fixed Income and Money Market Dealers Association, which is a self-regulatory organisation, was looking into framing prudential norms for the OTC market.

He said that the top management of many companies are not properly aware about derivatives, hence education should extend to them too.

Senior partner of Arthur Andersen Narayan Seshadri said that timely and regular reporting by participants in the derivatives market to the authorities and those in index futures to the clearing corporation was necessary.

He warned that inappropriate and inaccurate reporting may lead to the disaster like Barings.

National Securities Depository Limited Managing Director C B Bhave, explaining the clearing and settlement, said that every security transaction has two legs -- transfer of securities and transfer of payments.

''We have been pushing transfer of securities ahead of transfer of payments. During the days when transfer of securities took 60 days, payment problems never showed up,'' he said, adding that the situation is different now.

He noted that there is enormous pressure on the Reserve Bank of India to facilitate the electronic fund transfer facility.

He pointed out that even the best settlement system involves one to three clearing banks. ''When the volume of transactions goes up and around ten banks are involved, payment risks may increase,'' he felt.

He advocated setting up of a fund transfer system like Fedwire in the US.

UNI

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