Regulatory perspectives on derivatives markets in India
(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)
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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