Scrutinizing the Indian and Global Regulatory Framework for Derivative Trading

Derivatives markets generally are an integral part of capital markets in developed as well as in emerging market economies. These instruments assist business growth by disseminating effective price signals concerning exchange rates, indices and reference rates or other assets and thereby render both cash and derivatives markets more efficient. These instruments also offer protection from possible adverse market movements and can be used to manage or offset exposures by hedging or shifting risks particularly during periods of volatility thereby reducing costs. By allowing for the transfer of unwanted risk, derivatives can promote more efficient allocation of capital across the economy, increasing productivity in the economy. The paper describes the types, evolution ranging from L.C. Gupta, Securities and Regulation Act, Foreign Exchange Management Act regulations, Security and Exchange Board of India guidelines to the ones under the Reserve Bank of India. It also gives a critical analysis of how the Over the Counter system is different from the other centralized models globally. Based on the practices prescribed by the International Organisation of Securities Commissions, the Indian and international systems are evaluated on market efficiency and integrity, consumer protection or fairness of regulation and finally on financial integrity regulations. Moreover the policy issues with the Indian system, recent developments in this area along with suitable recommendations have been provided for the way forward.