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Cash & Futures Markets – segregation

Apr 30, 2001

A step in the right direction? It would seem so. For years’ Indian stock markets, brokers and investors have been having their cake and eating it too. The scenario was ideal i.e. Multiplicity of stock exchanges. Trade on one, default and move on to another. Multiplicity of settlement cycles. So, transfer positions from one to another and keep doing it thereby creating a parallel carry forward market. An ALBM (Automatic Lending and Borrowing Mechanism) product with different settlement cycles! A badla system, thereafter called the modified carry forward system and then re-christened BLESS which officially allowed you to carry forward positions, lend funds, borrow stock. A 5-day settlement on all 26 stock exchanges, which also allowed you to play the market! And to top it all, an official futures and options market where you can trade 30, 60 and 90 day contracts for Index futures!!!! Everybody took comfort from the fact that that Trade Guarantee Fund (TGF) of the two major exchanges was close to Rs 50 bn. That brokers were being forced to operate within specified capital adequacy norms, that the margins collected in cash and through bank guarantees were more than adequate to cover broker/exchange risk. Unfortunately, the playing field or the players never really changed. Every move to bring in a rolling settlement, to bring in uniform settlement cycles, to segregate the cash and futures markets and to remove interested broker directors from the management of Exchanges was resisted and maneuvered.

It now appears that this scam has finally prompted some firm and clear headed thinking in this direction. Segregation of the cash and futures markets is absolutely vital for the safety of the markets. It has also to be combined with common settlement cycles across exchanges. By merely getting banks to curtail broker funding will do more harm than good. Unfortunately, there is a big hue and cry now that volumes will dry up, arbitrage will disappear, there will be no liquidity, FIIs will leave the country, and the market indices will continue to tumble and investors will be left in the lurch.

Well, its time to take some tough decisions. The investors will continue to be left in the lurch if markets are not safe and systemic risk is not mitigated. Brokers will continue to be greedy and give clients credit against purchases because they have a 5 day (cash!) market to trade in. Sharp speculators, traders and market players will continue to misuse the system since there’s a window to square up, a window to borrow, to lend and to transfer positions! The lobbies have started making noise. The decibels are rising. Lets hope that the supposed demise of the market due to segregation will not come in the way this time. Lets see whether interested lobbies once again prevail or the Investor will win and see a safer and cleaner system.

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