Emerging Trends in the Derivative Market

    The derivative market has an important role to play in the economic development of a country.

    Changes in exchange rates, interest rates, and stock prices of different financial markets have increased the financial risk to the corporate world.

    Adverse changes in the macroeconomic factors have even threatened the very survival of the business world.

    It is, therefore, necessary to develop a set of new financial instruments known as derivatives in the Indian financial markets, to manage such risk.

    The objectives of these instruments are to provide commitments to prices for future dates for giving protection against adverse movements in future prices in order to reduce the extent of financial risks.

    The growth and position of the Indian derivative market help to analyze derivative trading in India.

    The growth and expansion of the financial derivative of NSE in India during the time period, i.e., 2010-2011 to 2017-18, the market turnover had grown from ₹ 1,76,63,664.57 Crore in 2009-2010 to 1,16,35,39,816.124 Crore in 2017-18.

    Derivatives markets in emerging economies have continued to grow since 2010, driven mostly by very strong growth in the OTC market.

    Some of the Emerging Trends in the Derivative Market are as follows:

    Increased use of alternative data

    Traditional financial data is becoming increasingly difficult to interpret, as it can be manipulated in many ways. This has led to a growing interest in alternative data, which can provide more insights into asset prices.

    New SEBI Rules

    i. Participation of Eligible Foreign Investors (EFIs) Commodity Derivatives in IFSC: SEBI made the amendment in the rule o participation of foreign investors in the derivatives market as per the guidelines.

    ii. Physical Settlement of Stock Derivatives: It has been decided that physical settlement shall be made mandatory for all stock derivatives.

    Stocks that are being cash-settled shall be ranked in descending order based on daily market capitalization averaged for the month of December 2018 SEBI has said that the bottom 50 stocks in the derivatives segment will move to delivery settlement every quarter in 2019.

    This means, that within nine months, the entire equity market will shift to delivery trading. In January 2018, SEBI first announced bringing 42 stocks in the derivatives segment under the compulsory delivery settlement.

    SEBI has now said that entire derivative trading should move to delivery settlement from the current cash system in a phased manner in 2019.

    The new system is aimed at discouraging excessive speculation and abrupt market volatility

    iii. Trading Hours for Commodity Derivatives Segment: Trading hours for the commodity derivatives segment, which is presently fixed between 10:00 am and 11:55 pm starting in October.

    Trading in Metal

    MCX will start with delivery trading in zinc and nickel. The exchange has been paying hefty fees to the London Metal Exchange and the Chicago Mercantile Exchange for price discovery even as domestic companies that require hedging mostly stay away due to the non-availability of local prices and speculators dominate, experts say.

    Commodity derivatives were launched by MCX in 2013, and the exchange never made any attempt to shift to delivery trades until new entrants in the segment, the NSE and the BSE, were not asked to do so.

    Domestic price discovery is possible if delivery of goods is involved as it could promote local price pooling. Tata Steel, Vedanta, and Hindalco are among the top global companies exporting base metals.

    Trading in Crude Oil and Natural Gas

    With natural gas demand growing faster than for any other fossil fuel, LNG futures may be finally taking off.

    Derivatives represented about 2 percent of global LNG production at the beginning of 2017 as an array of contracts around the world struggled to gain traction.

    But by the end of last year, volumes had grown to almost 23 percent, led by a burgeoning Intercontinental Exchange Inc. contract based on S&P Global Platts’ Japan-Korea Marker spot price assessments.

    While volumes are a long way off established global energy benchmarks such as Brent crude, where trade dwarfs worldwide oil production many times over, the accelerating growth in LNG derivatives illustrates how the market is maturing.

    An explosion in supply, from the U.S. to Australia, is bringing more market participants and a shift away from traditional pricing.

    Artificial Intelligence in Trading

    The derivative market is an indispensable part of financial services; it is a large global hut and has enormous space to accommodate the latest technology.

    Blockchain, AI, and robotics are already targeting it. We know that almost any asset can be traded as futures and options in the derivative market.

    However, the complexity of these instruments creates challenges for investors. Due to constantly changing marketplace dynamics and regulatory guidelines, robust pricing solutions are critical.

    A proper pricing tool is a requirement from buy-side and sell-side trading desks to compliance for pricing and accounting teams, etc.

    The most popular options available in the market have certain limitations which cannot be ignored.

    For example, the solutions are so complicated that to use them, one needs to be trained first.

    These solutions are so heavily priced that not everyone can afford to be benefited, also; due to their large size, they are restricted to terminals and can be used with limited devices.

    Greater focus on risk management

    Risk management has always been important in the derivatives market, but it is likely to become even more emphasized in the future as banks and other financial institutions become increasingly risk-averse.

    Greater regulation

    The derivatives market is currently one of the least regulated financial markets, but this is likely to change in the future as authorities seek to mitigate the risks associated with derivative trading

    Disclaimer: While we make every effort to update the information, products, and services on our website and related platforms/websites, inadvertent inaccuracies, typographical errors, or delays in updating the information may occur. The material provided on this site and associated web pages is for reference and general information purposes only. In case of any inconsistencies between the information provided on this site and the respective product/service document, the details mentioned in the product/service document shall prevail. Subscribers and users are advised to seek professional advice before acting on the information contained herein. It is recommended that users make an informed decision regarding any product or service after reviewing the relevant product/service document and applicable terms and conditions. If any inconsistencies are observed, please reach out to us.

    Latest Articles

    Related Stories

    Leave A Reply

    Please enter your comment!
    Please enter your name here

    Join our newsletter and stay updated!