(Keynote  address  by  Dr.  Subir  Gokarn,  Deputy  Governor,  Reserve  Bank  of  India  at  the  International  Options  Market  Association,  World  Federation  of  Exchanges  Annual  Conference  organised  by  the  National  Stock  Exchange  at  Mumbai  on  May  4,  2011)    

Introduction  

It  is  a  pleasure  for  me  to  be  speaking  at  this  conference  organized  by  the  International  Options  Market  Association.  The  presence  and  role  of  derivatives  in  India,  both  OTC  and  Exchange  traded,  has  been  increasing  steadily  over  the  years.  These  instruments  are  an  important  component  of  the  overall  financial  sector  strategy  and  the  broad  regulatory  objective  is  toensure  that  they  are  used  to  their  potential  in  ways  that  are  consistent  with  both  financial  development  and  the  contribution  o  financial  markets  to  economic  growth.   

I  would  like  to  begin  by  laying  out  a  simple  framework,  which  helps  us  think  about  financial  sector  development  in  terms  of  multiple  objectives.  This  will  provide  a  useful  backdrop  to  the  various  issues  relating  to  derivatives  in  India,  which  I  will  then  go  on  to  talk  about.  

Financial  sector  development  can  broadly  be  viewed  as  pursuing  four  objectives.  

Efficiency:We  can  look  at  the  notion  of  efficiency  from  two  perspectives.  For  the  provider  of  products  and  services,  it  means  the  ability  to  do  this  at  the  lowest  possible  cost,  with  the  full  benefit  of  technology  and  market  infrastructure.  For  the  user,  efficiency  relates  to  the  availability  of  products  and  services  which  address  his/her  requirements  at  the  lowest  possible  price.   

Stability:From  the  viewpoint  of  the  financial  system,  stability  requires  that  aggregate  risk  is  bounded  in  some  way.  This  requires,  in  turn,  that  individual  participants  be  required  to  mitigate  and  manage  their  own  risks.  However,  in  situations  in  which  systemic  risk  goes  beyond  the  aggregate  individual  risk,  additional  measures  may  be  warranted.  

Transparency:  The  basic  premise  is:  "what  cannot  be  measured  cannot  be  managed".   The  more  market  participants  know  about  overall  activities  and  outcomes,  the  better  able  they  are  to  make  their  cost‐benefit  calculations  and  act  on  them,  contributing  to  the  overall  effectiveness  of  the  market.  

Inclusion:  Financial  development  is  not  an  end  in  itself.  It  serves  the  broader  purpose  of  facilitating  economic  activity,  through  resource  mobilization  and  risk  management.  The  more  accessible  the  financial  system  is  to  individuals  in  pursuit  of  these  two  objectives,  the  better.  

Against  this  backdrop,  I  will  address  four  sets  of  issues:  

1.  The  landscape  for  OTC  derivatives  in  India  

2.  Regulatory  concerns  and  steps  taken  

3.  The  roadmap  for  OTC  derivatives  

4.  The  development  of  markets  in  India  

^∗  Inputs  from  Sudarsana  Sahoo,  Edwin  Prabhu,  Rajib  Das,  H.S.  Mohanty,  Nishita  Raje  and  G.  Mahalingam  are  gratefully  acknowledged

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