Speaking in the workshop on "Introduction of Derivatives in the Indian Capital Market : Issues and Prospects", organised by Federation of Indian Chambers of Commerce and Industries (FICCI), L C Gupta, chairman, Committee on Derivatives Trading in India, opined that small investors should be kept away from the derivatives trading at the introductory phase. However, Ashish Chauhan, vice-president, National Stock Exchange, disagreed saying derivatives are risk hedging mechanisms and all over the world, the Indians have always been good at hedging risks. According toChauhan, all players including the FIs, FIIs and small and large investors should be allowed to take part in derivative trading.

Dennis Grubb, chief, FIRE Project, Price Water House, said that worldwide derivatives are mainly professionals' forte and the small investors have, as a bunch, always lost to the professionals. So the pre-condition for the introduction of derivatives is educating people about the related aspects and to have a complete screen-based trading system where the regulatory authority has access to every contract.

Addressing the seminar, Ashish Chauhan, Vice-president, National Stock Exchange said that the question was not whether India is prepared for derivatives but when to launch derivatives in the country. "We Indians are very good at risk management and know to exercise the right option," he added. While dwelling on the issue of contract size (SEBI has kept a minimum contract size of Rs 1 lakh), he said that it was seen in countries like Australia and South Africa that withreduction in contract size, the liquidity in the system got a big boost.

He emphasised the need for adequate hedging mechanisms when risk is being borne by an individual. "Earlier, the government was managing risk for all of us on a large number of fronts like prices of petroleum but now that these risks are being transferred to individuals, there is a need for risk cover," he pointed out.

Chauhan disclosed that NSE had approached the market watchdog with the draft of a certification programme, which would help brokers and others to take a test in derivatives and get a certificate from NSE, based on their performance. He added that with an effective regulatory framework, incidents like Nick Leeson and collapse of Barings Bank can be eliminated from the Indian market.

The National Stock Exchange will start with index futures and then introduce index options. In the third phase, trading in individual scrips would be allowed. He said that to start with, there are contracts for a three month period but asand when SEBI permits, the duration of forward contracts can be increased from six months to one year. "It is better to have index-based futures and options rather than individual scrip-based ones since individual scrips are subject to a higher degree of volatility," he added.

Earlier, M K Khanna, managing director, UTI Securities pointed out that investor education was necessary to make derivatives a success in India. "It is not that options trading doesn't exist in India. It is practiced privately by a few market players by various names in different parts of the country but they don't want the general public to take advantage of the same," he said.

Participants were of the opinion that the retail investor must fully understand the operation of derivatives before taking as plunge or else, he may end up losing money as has happened on a number of previous occasions. "The whole concept of derivatives is very tempting since you can take a very high exposure by paying only a small amount on daily margins,"said Gupta.