Derivative markets are rapidly gaining in size in India.

In terms of popularity also, these markets are catching on like a forest fire. Derivatives markets broadly can be classified into two categories one Otc (over the counter) and second is traded at exchange The Reserve Bank of India has permitted options, interest rate swaps, currency swaps and other risk reductions OTC derivative products

Derivatives contracts such as futures and forwards are for risk-averse economic agents to guard themselves against uncertainties arising out of price fluctuations in various asset, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. This instrument is used by all sections of businesses, such as corporate, , banks, financial institutions, retail investors, etc. According to the International Swaps and Derivatives Association, more than 90 percent of the global 500 corporations use derivatives for hedging risks in interest rates, foreign exchange, and equities. In the over-the-counter (OTC) markets, interest rates (82.5%), foreign exchange (13.5%), and credit form the major derivatives, whereas in the exchange-traded segment, interest rates, government debt, equity index, and stock futures form the major chunk of the derivatives.

Regulation of Derivative Markets in India

The SEBI Board in its meeting on June 24, 2002 considered some important issues relating to the derivative markets including: Physical settlement of stock options and stock futures contracts. Review of the eligibility criteria of stocks on which derivative products are permitted. Use of sub-brokers in the derivative markets. Norms for use of derivatives by mutual funds

The recommendations of the Advisory Committee on Derivatives on some of these issues were also placed before the SEBI Board. The Board desired that these issues be reconsidered by the Advisory Committee on Derivatives (ACD) and requested a detailed report on the aforesaid issues for the consideration of the Board. In the meantime, several other important issues like the issue of minimum contract size, the segregation of the cash and derivative segments of the exchange and the surveillance issues in the derivatives market were also placed before the ACD for its consideration. The Advisory Committee therefore decided to take this opportunity to present a comprehensive report on the development and regulation of derivative markets including a review of the recommendations of the L. C. Gupta Committee (LCGC).

Four years have elapsed since the LCGC Report of March 1998. During this period therehave been several significant changes in the structure of the Indian Capital Markets which include, dematerialisation of shares, rolling settlement on a T+3 basis, client level and Value at Risk (VaR) based margining in both the derivative and cash markets and proposed demutualization of Exchanges. Equity derivative markets have now been in existence for two years and the markets have grown in size and diversity of products.This therefore appears to be an appropriate time for a comprehensive review of the development and regulation of derivative markets.

Besides the Forward market in currencies has been a vibrant market in India for several decades.

Derivative trading in India takes can place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. Derivative Exchange/Segment function as a SelfRegulatory Organisation and Sebi acts as the oversight regulator. The clearing & settlement of all trades on the Derivative Exchange/Segment would have to be through a Clearing Corporation/House, which is independent in governance and membership from the Derivative Exchange/Segment.

With the amendment in the definition of 'securities' under SC(R)A (to include derivative contracts in the definition of securities), derivatives trading takes place under the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.

Dr. L.C Gupta Committee constituted by Sebi had laid down the regulatory framework for derivative trading in India. SEBI has also framed suggestive bye-law for Derivative Exchanges/Segments and their Clearing Corporation/House which lay's down the provisions for trading and settlement of derivative contracts.

The Rules, Bye-laws & Regulations of the Derivative Segment of the Exchanges and their Clearing Corporation/House have to be framed in line with the suggestive Bye-laws. Sebi has also laid the eligibility conditions for Derivative Exchange/Segment and its Clearing Corporation/House.

The eligibility conditions have been framed to ensure that Derivative Exchange/Segment & Clearing Corporation/House provide a transparent trading environment, safety & integrity and provide facilities for redressal of investor grievances.