Volumes in index futures market have been low since the introduction of the product. It has grown from Rs 2-3 crore a day in the first week of product's introduction to Rs 8-10 crore a day now, on both BSE and NSE, yet these low volumes in the market have been causing worry to the marketmen.

Among the probable factors responsible for low activity in this market is the lack of awareness about the product and its strategic uses. We must appreciate that it is not just a new product; it is an entirely new market which has come into existence. People essentially need to upgrade their knowledge and reach a comfort level before they jump into the fray. Early success of this market would, unequivocally, depend on the speed with which we run on the learning curve.

I applaud BSE for its strenuous efforts to educate investors through a series of seminars on derivatives and the recent decision of NSE and the regulator Sebi to join the mission, which itself would contribute significantly towards this market's growth.

Second, financial institutions (FIs) are absent from the market. FIs are busy complying with statutory requirements which would enable them to participate in the index futures market. For instance, mutual funds are required to take investors' and their trustees' approvals to participate in the market. Therefore, it is only a procedural delay and institutions may be expected to make their presence felt in the market soon.

Third, index futures market is still awaiting foreign institutional investors' (FIIs) trades. FIIs are not participating in the market because of lack of clarity on the issue of margining on their trades in index futures contracts. RBI is understood to have clarified that FIIs may pay margins, both initial and marking to market, on their trades and written communication from RBI, on the subject, is expected shortly.

Still, the demand of FIIs to allow them to deposit their initial margin in forex terms in forex-denominated fixed deposits receipts (FDRs) or forex-denominated bank guarantee remains unaddressed by RBI, which may prove to be a big impediment in attracting volumes from them.

Fourth factor is the participants' resistance to the up-front margins in this market. It is stipulated in the regulations that to participate in index futures market, operators are required to pay up-front margins on their positions to brokers. Incidentally, the participants in our cash market are accustomed to positions on daily or weekly basis without paying any margins whatsoever. Therefore, the concept of up-front margin payments would definitely take some time to sink in.

Fifth, lack of infrastructure facilities like back office operations software at the trading and/or clearing members' end is another important reason of low liquidity in the market. Not many of the registered trading and/or clearing members are active in the market as of now.

Further non-availability of the guidelines on accounting and taxation issues on index futures contracts is a gigantic impediment to participation in the market. The participants are looking forward to Institute of Chartered Accountants of India for accounting guidelines and to the central government for clarification on the tax treatment of index futures contracts. Both the issues should be dealt with effectively as early as possible, as this is a must to know accounting and tax treatments of these contracts before they venture into business. As for existing volumes in the index futures market; it has been growing gradually over the last one month, which is satisfactory.

It is laudable that participants are structuring their infrastructure and required competencies before they make a serious business move. I would rather prefer late but well prepared participants to the early but unprepared participants. Further, I think we have just started a marathon and we do have a very long way to go. Therefore, in my opinion, existing volumes in the index futures market, which are reflecting strong and irreversible growth signals, should be viewed positively and it is not a matter of panic at all.

(Views expressed here are the auther's own and do not represent the views of his organisation. The author may be reached at navneet@uthplanet.com)