[ G C O N T H E G R O U N D | I N D I A ]
R . Anand : A lot of changes have been introduced in the Indian market with regard to both domestic and global investors , but there are still reforms to carry out . One is deepening the securities lending market . There is a securities lending and borrowing mechanism in place , but it has yet to take off . Nor is there a fully-fledged corporate debt market . We need to develop the ecosystem around this market .
Richard Schwartz : How constrained is the securities lending market ?
Atul Badkar : The total open interest will be approximately $ 500 - 750 million and the total ADV will not be more than $ 40 million . This is probably because there is a very active single stock futures market . All categories of investor that exist in mature global markets are here too , such as retail , HNI , domestic prop , mutual funds , insurance and FPIs ( HFT , hedge funds , quant funds , long only , etc ). Out of these categories , whoever wants to or can short stocks , usually uses single stock futures . India is probably the largest single stock futures market in the world .
David Jaegly : Either you do it through the derivatives market with a stock lending contract or through the OTC market , which is not available here . In Europe this is how the market works . It ’ s a very secure framework and agency lending is very popular in Europe .
Hans Prakash : Entities like us used to have an OTC stock lending licence . In 2003-4 , we were almost at $ 2-3 billion of OTC business and it was doing phenomenally well . At that time , the futures markets had just started off . Later , stock lending was channelled through exchange platforms rather than the OTC route . Both exchanges are doing their best , but it is really taking time for it to work out , largely because of the limited revenue an intermediary can make out of it as a new segment .
David Jaegly : We have a steady and growing mutual funds industry here . One of the key players in Europe in this market is mutual funds . They lend out their portfolio and receive fees from that . We have this capacity too . I think it ’ s a question of education , because mutual funds are risk-averse . If you have a very sound process and can convince the local infrastructure of the potential scope of the business , securities lending could be a way of encouraging additional flows and liquidity from domestic players .
Hans Prakash : Insurance companies are still not allowed to trade in equity derivatives and mutual funds have restrictions in terms of trading in derivatives . So , you ’ re right as far as risk aversion is concerned . Eventually the regulators may open up . I think they are moving in the right direction .
Viraj Kulharni : As Atul mentioned , the size of the securities lending business is not what it can potentially be . David mentioned Europe , but a closer-to-home analogy is Korea . Korea has close to $ 800 billion of securities lending activity . Technically , India could have a larger market . It all boils down to how the regulator wanted the market to develop ; when securities lending started , there was a lot of paperwork , which discouraged potential participants . Another inhibiting factor was the roll over of settlements , which limits the demand for borrowing . There is scope to grow the segment .
R . Anand : Also bear in mind the cost involved in running a securities lending desk , when there are already attractive opportunities in the cash , derivatives and other markets .
Richard Schwartz : The explosive growth of derivatives has been mentioned several times , Is it sustainable ?
Atul Badkar : There is no doubt that the equity derivatives market in India has exploded . While we speak about this growth , we are also leaders in terms of volume in certain instruments . SEBI has also been proactively putting out discussion papers managing this growth with caution . For example , globally there have been HFT accidents , so SEBI is asking for suggestions on how we can keep growing without having similar accidents . We also need to learn from others ’ mistakes . To make sure that derivatives are not mis-sold in the market and the smallest investor is protected , the lot size of certain contracts had been increased to make sure that it ’ s mainly accessible to a slightly more advanced and well-informed investor . We have been taking steps intermittently and are gathering a lot of industry suggestions and implementing them in phases . From that perspective , I think there ’ s much more to do . We could grow five times from here in the next five to seven years as long as the appropriate risk control measures and technology are in place .
68 Global Custodian Summer 2018