Book contents
- Frontmatter
- Dedication
- Contents
- List of Tables, Figures and Boxes
- Foreword
- Preface to the First Edition
- Preface to the Second Edition
- Acknowledgements
- Part–I Introduction
- Part–II Forwards and Futures
- Part–III Swaps
- Part–IV Options
- Part–V Other Derivatives and Derivative-like Instruments
- Part–VI Accounting, Taxation and Regulatory Framework
- 17 Accounting and Taxation
- 18 Infrastructure for Derivatives Trading
- 19 Regulation of Derivatives Trading: An Introduction
- Part–VII Portfolio Management and Management of Derivative Risks
- Bibliography
- Index
19 - Regulation of Derivatives Trading: An Introduction
from Part–VI - Accounting, Taxation and Regulatory Framework
Published online by Cambridge University Press: 02 August 2019
- Frontmatter
- Dedication
- Contents
- List of Tables, Figures and Boxes
- Foreword
- Preface to the First Edition
- Preface to the Second Edition
- Acknowledgements
- Part–I Introduction
- Part–II Forwards and Futures
- Part–III Swaps
- Part–IV Options
- Part–V Other Derivatives and Derivative-like Instruments
- Part–VI Accounting, Taxation and Regulatory Framework
- 17 Accounting and Taxation
- 18 Infrastructure for Derivatives Trading
- 19 Regulation of Derivatives Trading: An Introduction
- Part–VII Portfolio Management and Management of Derivative Risks
- Bibliography
- Index
Summary
W. R. Natu, a former Chairman of the Forward Markets Commission and one of the pioneer futures regulators in India summarised the need for regulation in the following words:
The private interest of an operator can … be at considerable variance with the interest of the trade and public interest. It is because of this divergence that the need for regulation arises.
While this was in relation to futures markets, it is applicable to derivatives generally. In addition to the need for regulation in order to secure the public interest, there is also another justification, at a more practical and down-to-earth level, for regulating derivatives. This arises in connection with such matters as which varieties of a particular commodity or financial instrument may be delivered against the futures market, where delivery can be given or taken, how price differences are to be fixed between one variety and another, etc. Generally, regulations on such matters are framed by the exchanges which operate futures markets, and the national regulatory authority does not come into the picture except in abnormal circumstances.
Regulatory instruments
The main instruments of regulation used by the regulatory authorities and/or governing bodies of individual markets for ensuring orderly trading, are the following:
a. Margin variation: As explained earlier in this book, margin is a proportion of the contract value which a buyer or seller in the futures market is required to put up against his transaction. The purpose of margin is to prevent defaults. The higher the margin the greater the amount of capital which is locked up against a particular transaction and, therefore, the higher the cost of the contract. Increase in margins is an inducement to reduce the volume of trading, and vice-versa. Increase in margin is generally resorted to when the regulatory authorities feel that there is an excess of speculative activity. On the other hand, decrease in margins is prescribed when it is felt that there is inadequate trading activity thus impairing liquidity of the market.
b. Imposition of special margins: Special margins, which are over and above the ordinary margins referred to in (i) above, are generally imposed on only one side of the market-place. For example, when it is felt that there is an excessive amount of speculative buying in the market, it may be decided to impose a special margin on buyers alone.
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- Chapter
- Information
- Derivatives , pp. 293 - 298Publisher: Cambridge University PressPrint publication year: 2017