James Shapiro of the Bombay Stock Exchange discusses some of its most recent developments and initiatives as it continues to try to support and drive market innovation and trends.
Date: Mar 2011
As the Bombay Stock Exchange (BSE) pursues various initiatives to ensure continued market development and innovation, James Shapiro said in an interview that it has recently introduced delivery-based settlement for derivatives.
Previously, individual stock and options were traded in cash-delivery format, where at the end of the contract parties looked at the relative price of the cash and futures before settling the difference with the customer.
With delivery-based settlement, Shapiro explained, if an option expires in-the-money, then delivery means the customer actually gets the stock in their account.
It is more difficult to manipulate the market in this way, he said, as it converges at the end of the contact date to a single date. Plus, it encourages people to think of this as a way to invest as opposed to a way to speculate in the short term.
At the same time, the BSE has launched a Shariah-compliant index comprising 50 of the largest Shariah-compliant stocks from the universe of 500 in India.
The Exchange has partnered with a Shariah analysis firm, which does the certification of each company according to transparent rules, said Shapiro.
There has been a lot of interest in such a product, he explained, both from inside India, given its large Muslim population, and also from the Middle East, Malaysia and Indonesia.
As a result, Shapiro said he expects several ETFs and mutual funds to be based on this index in the coming six to 12 months.
Comparing India with more developed Asian markets
According to Shapiro, India’s financial markets have some key strengths, such as their well-established and functioning regulatory environment.
There is an effective infrastructure, he explained, with two stock exchanges, two clearing houses and two depositories – all of which are linked and trading electronically with certificates in dematerialised form.
Further, he added, the regulator has been quite conservative in terms of risk management around margin requirements – so even when there has been financial turmoil globally, India has been quite well insulated.
But perhaps the biggest difference between India and many other markets is related to the staggering potential of the financial system, said Shapiro, because of the country’s economic growth – and the prospects that it will continue to grow.
As a result, the domestic financial markets will grow in tandem, but will only be able to keep up if there is also growth in the number of intermediaries, brokers and products.
A regulatory balancing act
As the Indian market continues to develop further, therefore, Shapiro said the regulator has to weigh up how quickly it allows it to move forward.
There is a healthy give-and-take between the stock exchanges and the regulator in terms of introducing new products and asset classes, he explained, with recent moves to allow stock borrowing and lending, as well as currency derivatives, examples of this.
Yet there is a focus on doing such things in a way that doesn’t introduce instability at the same time.