International competitiveness quarterly update January ... However, the offshore market continues

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  • International competitiveness quarterly updateJanuary March 2016

    IGIDR Finance Research Group

    Finance Research GroupIndira Gandhi Institute of Development Research

    Mumbai

  • CONTENTS

    Contents

    1 Executive Summary 2

    2 Part I: International competitiveness update 32.1 Currency derivatives market . . . . . . . . . . . . . . . . . . . . . 32.2 Equity derivatives market . . . . . . . . . . . . . . . . . . . . . . . 32.3 Commodity derivatives market . . . . . . . . . . . . . . . . . . . . 32.4 Equity trading market . . . . . . . . . . . . . . . . . . . . . . . . . 3

    3 Part II: Implementation status of policy recommendations 83.1 Status of policy recommendations common across all areas . . . . 93.2 Currency derivatives market . . . . . . . . . . . . . . . . . . . . . 10

    3.2.1 Implementation status of policy recommendations . . . . 103.2.2 Currency derivatives regulatory update, October 2015

    March 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.3 Equity derivatives market . . . . . . . . . . . . . . . . . . . . . . . 12

    3.3.1 Implementation status of the policy recommendations . . 123.3.2 Regulatory update, October 2015 March 2016 . . . . . . . 12

    3.4 Commodity derivatives . . . . . . . . . . . . . . . . . . . . . . . . 143.4.1 Implementation status of the policy recommendations . . 143.4.2 Regulatory update, October 2015 March 2016 . . . . . . 15

    3.5 Equity trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193.5.1 Implementation status of the policy recommendations . . 193.5.2 Regulatory interventions in the period January March 2016 19

    4 Part III: Impact assessment of increase in lot size for equity derivatives 214.1 Market measures used for comparison . . . . . . . . . . . . . . . . 214.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214.3 Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234.5 Graphs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

    4.5.1 Nifty Futures . . . . . . . . . . . . . . . . . . . . . . . . . . 254.5.2 Nifty Options . . . . . . . . . . . . . . . . . . . . . . . . . . 27

    Ministry of Finance Department of Economic Affairs 1

  • EXECUTIVE SUMMARY

    1 Executive Summary

    This update has three parts. In the first part, we present how Indian marketsfor currency derivatives, equity derivatives, commodity derivatives and equitytrading are faring with respect to their global competitor markets in the quarterJan Mar 2016.

    In the second part, we provide an update on the implementation status of thepolicy recommendations made to the Standing Council for International Com-petitiveness of Indian Financial System (SCIIFS) for each of the above markets.In this part, we also present a brief on the regulatory interventions in these mar-kets during the period October 2015 March 2016.

    In the third part, we analyse the impact of a recent regulatory action taken bySEBI in the equity index derivatives market, an increase in the trading lot sizefrom Rs. 200,000 to Rs. 500,000.

    Ministry of Finance Department of Economic Affairs 2

  • PART I: INTERNATIONAL COMPETITIVENESS UPDATE

    2 Part I: International competitiveness update

    2.1 Currency derivatives market

    Table 1 shows that:

    In the exchange traded market: In Q1-16, the futures market, both onshore and offshore, saw an increase in

    traded volume (TV) relative to the previous quarter (Q4-15). The quarter onquarter (Q-o-Q) increase was higher onshore (26.2%) than offshore (11.8%).Onshore, the increase in TV was accompanied by an increase in the open in-terest (OI) (by 11.2%). However, the offshore market saw a decline in OI (by20%).

    The onshore options market saw a Q-o-Q increase in TV (by 39.5%) and in OI(by 6.8%).

    The onshore over-the-counter (OTC) market volume saw a Q-o-Q increase (by 3.9%).

    Summary: Onshore futures markets have seen an improvement vis-a-vis the offshoremarkets. There has also been an improvement in the options market onshore.

    2.2 Equity derivatives market

    Table 2 shows that:

    For equity index futures, on a Q-o-Q basis: The onshore TV increased (by 30.5%) while the offshore TV declined (by

    75.9%). Onshore OI increased (by 6.4%) while offshore OI declined (by 38.8%). De-

    spite this, in Q1-16, offshore OI was higher than onshore OI (by 18.4%).

    India retains the dominant status on equity index options. Both TV (by 39.8%) and OI (by 5.8%) increased Q-o-Q.

    There was a decline in OI for participatory notes (PNs) (by 13.3%).

    Summary: There has been an increase in interest in the onshore equity index futuresmarket. However, the offshore market continues to have a higher OI.

    2.3 Commodity derivatives market

    Table 3 shows that agri commodity derivatives trading in India is negligible. This isdespite the fact that India is one of the largest producers of agricultural commodi-ties such as wheat, cotton and sugar.

    Table 4 shows that in commodities like gold, silver and crude oil derivatives tradingin India is in line with global exchanges.

    2.4 Equity trading market

    Table 5 shows that:

    The liquidity in the onshore exchanges is concentrated in the first 10% of firms(around 290 firms).

    The top 10% firms capture 80% of daily traded volumes in the equity markets.

    Ministry of Finance Department of Economic Affairs 3

  • PART I: INTERNATIONAL COMPETITIVENESS UPDATETa

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    Ministry of Finance Department of Economic Affairs 4

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