Index related derivatives enter capital market:

MPI best option for Lanka

Charumini DE SILVA

Derivatives will take centre stage in the future. Regional experience strongly confirms this position. In India, turnover attributed to derivatives is in excess of four times the equity market.

Securities and Exchange Commission (SEC) Director General, Channa de Silva said market participation is expected to increase by 200 percent with the introduction of index related derivatives to the capital market.

Asia has 75 percent of the index options whereas the US has only 8 percent of it.

“However, in the stock option, 83 percent is dominated by the US and Asia only has two percent. More than 30 stock exchanges in the world deal with the index option, he said.

“We also can commence with the index option, as market depth, free float and liquidity will be less felt in index related derivative products,” de Silva said.

Therefore, the Milanka Price Index (MPI) will be one of the best options for Sri Lanka to check on the ability to move on derivatives to the equity market, as it is one of the sensitive indexes, de Silva said.

He said Sri Lanka need not reinvent the wheel as it already has support from the regional countries such as India, Korea and China.

SEC had a close relationship with the National Stock Exchange of India (NSE).

There are many lessons and experiences that we need to adopt and share from the countries in the Asian region. Sri Lanka has a long way to go since our market activities are still in the early stage of development.

The Director General said: “We are in the right neighbourhood.

Asia is the gateway to emerging economies in the world.

“We are privileged to get ready support from regional countries. The support that we are getting from these countries is a strength and encouraging to an emerging market like the Colombo Stock Exchange (CSE)”.

The CSE will set up the Clearing Corporation under the regulatory purview of the SEC to minimize CSE settlement risks.

The financial strength of the Clearing Corporation matters most and this will ensure that foreign and local major investors reduce the risk of their transactions in the capital market. Having a Clearing Corporation would drastically reduce the risks in the stock market transactions, de Silva said.

Securities and Exchange Commission (SEC) Chairman, Udayasri Kariyawasam said that introducing derivatives to the capital market is timely.

In the global arena the Europe (44 percent) and North Americans (39 percent) dominate the derivatives and only 13 percent is with the Asians.

The Securities and Exchange Commission (SEC) has submitted a proposal to the Government to de-mutualize the Colombo Stock Exchange (CSE).

SEC is planning to increase the number of stock broking companies with the market volume increasing.

More ventures and capital inflows are expected with the introduction of new instruments to the market.

The capital infrastructure developments in the region are comparatively better and small countries like us can get the assistance of them, he said. He was speaking at the opening session of a Regional Conference on Derivatives, which was organized by the Financial Services Academy (FSA) of the SEC at the Galadari Hotel yesterday.

The conference will conclude on March 26. This is the first time that Sri Lanka is hosting a conference on derivatives.