India is forecast to become the world’s third largest economy by 2030, yet the OTC derivatives market remains small.
According to the Bank for International Settlements, the average daily turnover of interest rate derivatives accounted for just 0.1 per cent of the overall global market in 2022.
Now, the International Swaps and Derivatives Association (ISDA) has published a whitepaper exploring the growth of India’s financial market.
The report includes a series of market and policy recommendations to encourage the development of a safe and efficient over-the-counter (OTC) derivatives market.
The suggestions are centred on five key pillars, one of which is to broaden product development, innovation and diversification.
ISLA recommends developing standardised term benchmarks to reduce basis risk, expanding the scope of the credit derivatives market and enabling onshore OTC commodity and equity derivatives markets.
The whitepaper also advocates for standardisation across regulations and international practices, to ‘increase harmonisation and encourage international participation and investment’. This includes allowing full substituted compliance for Indian branches of foreign banks and expanding the list of eligible collateral.
“Derivatives are critical for healthy, competitive financial markets and help spur economic growth,” contends Scott O’Malia, ISDA’s chief executive. “They give companies the ability to raise financing at the best rate and manage their risks, enabling those firms to invest and grow.”
