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BSE kicks off futures trades

History was made in the Indian capital markets today when the first official derivative instrument -- the BSE Sensex futures contract -- commenced trading. The first contract was for June expiration and got traded at 4,755. By 1400 IST, about 150 contracts were traded and the aggregate volume was around Rs 37.5 million.

Most of the trading was done by large traders and brokers. Mutual funds and foreign institutional will continue to be absent from this market for a few more days till legalities are clear.

Though more than 75 BSE brokers have obtained permission to get into index futures trading, only a few of them were fully prepared and participated in today's market. "Hardly ten brokers were involved in today's trading," says a leading BSE broker. He adds, "The market lacks depth at the moment due to the absence of institutions. However, in a couple of years, I see the volumes in the futures market overtaking the cash market."

Today's trading in the futures segment went off well without any technical glitches.

So what are brokers doing about futures trades? One BSE member says that he has already dabbled today in small amounts. Another leading light of the BSE says that he will watch the trading for a few days and then start trading in index futures.

Not all are happy with the introduction of index futures at this stage. J Mulraj, columnist, says, "The time is not yet ripe for the introduction of derivatives in Indian markets. The necessary legal and regulatory frameworks are not in place to ensure the smooth functioning of the system. In the short- to medium-term, this will lead to volatility in the market."

"Institutions will need to take the necessary permission from their respective boards to participate in the futures mart. It will also be for the first time that domestic and foreign institutions pay margins. They will also take some time to put a proper back office in place," says BSE member Motilal Oswal.

There are six categories in which traders can take positions: one-month futures, two-month futures, three-month futures and three spread futures. The main advantage of this system is the mark-to-market where profit/loss is calculated on a daily basis and credited/debited to the client's account. For mark-to-market purposes, the BSE will declare an index value at the end of day's trade for the futures market.

How it works

The value of one contract is fixed at Rs 250,000. This is standard, irrespective of whether the market goes up or down. The BSE has decided on a multiple of 50 for calculation of profit/loss. A trader can, thus, take a position of Rs 250,000 on the Sensex. If he goes long on a June contract at 4,800 and the official index close for that day is 4,775, the trader's account is debited to the extent of 25 points multiplied by 50 -- a loss of Rs 1,250. The next day, the contract will have a starting value of 4,775 and if the index goes up by 50 points on that day, his account will be credited to that extent and the contract reset to the new index level for the next day.

The National Stock Exchange, or NSE, will start its index futures trading on Monday. The government opened the way for futures trading in March when it lifted a 1969 ban on forward contracts.

ALSO SEE

Derivatives Center

Business