Over-the-counter derivative markets in India – Issues and perspectives

The present article tries to put in perspective the boundary conditions, imposed by the macroeconomic constraints, which have guided the evolution of over-the-counter (OTC) markets in India and underlines the point that the process of transiting from a predominantly OTC based model to an exchange-traded model needs to follow a calibrated path. Through this transition period, the overall regulatory approach towards OTC derivative markets is as important as addressing the transactional aspects. In India, unlike the developed financial markets where OTC derivative markets epitomised complex, unregulated financial innovations that grew exponentially over the last two decades, the OTC derivative markets have evolved within a regulated space. The major elements of this regulatory framework include a broad specification of products to be permitted, nature of participants in the markets, distinct responsibilities for market makers and users for all OTC derivatives, effective reporting systems for capturing systemic information and focus on developing market infrastructure for post-trade clearing and settlement. Given the above context, the OTC space in India for interest rate and forex derivatives will continue to operate within a regulated manner with increased transparency. New instruments for exchanges will be introduced in a gradual manner, as hitherto. Further areas for strengthening the functioning of OTC markets will include greater standardisation of OTC derivatives and extending central clearing arrangements for such contracts where feasible. Work has already been initiated for designing a centralised trade reporting system for all OTC derivatives for better systemic oversight and market transparency.