Lessons from Pre-Trade Risk Management in the Indian Equity Markets

by Anshuman Jaswal, PhD, July 16, 2010
Operations/ Benchmarking


The Indian secondary equity markets are different from most of their global counterparts because pre-trade risk management plays a very important role in their functioning. In this system, collateral is deposited with the exchange to cover trades undertaken by a broker’s clients.

In a new report, Lessons from Pre-Trade Risk Management in the Indian Equity Markets, Celent describes the current risk management practices in the Indian equity cash and derivative markets. While the practitioners are satisfied with the risk management system (RMS), there are certainly some improvements that could be made, such as greater flexibility for the brokers within the framework of the overall norms. At the same time, the robust pre-trade RMS in the Indian markets offers an interesting opportunity for market regulators and participants elsewhere to learn, and perhaps even to integrate into their systems.

In turnover terms, the derivatives market in NSE (the main equity derivatives exchange) has shown 64% growth from US$2.3 trillion in FY 2009 to US$3.8 trillion in FY 2010. Notably, the share of index options has risen from 34% to 46%, while index futures have declined from 32% to 22%. Importantly, this market requires a strong risk management system to cater to the fast growth as well as the ever-changing composition of the products within the futures and options market.

“Indian risk management practices offer an interesting alternative to some of the existing risk management systems in the leading global markets,” says Anshuman Jaswal, Celent, Senior Analyst and author of the report. “Hence, this risk management framework could prove to be useful for the regulators and exchanges that are interested in reducing systemic risk through more effective pre-trade regulation.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents

Executive Summary




Market Overview


Risk Management Framework for the Cash Market


Risk Management for Equity Derivatives



Index Futures



Index Options



Single Stock Futures


Stock Options


Possible Changes in RMS




Leveraging Celent’s Expertise



Support for Financial Institutions



Support for Vendors


Related Celent Research


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