25 June, 2007

In response to the demand of CSE president to consider financial derivatives in our capital market and to prepare a legal framework, SEC Chairman addressed the need and assured SEC’s initiative

CSE President Mr. MKM Mohiuddin has urged the regulatory authority to consider introducing financial derivatives products as the present situation warrants such products, in his speech in the closing ceremony of a 4-day long training and certification program on derivatives this evening at BRAC INN, Dhaka. The training program was jointly organized by Chittagong Stock Exchange and the National Stock Exchange of India Ltd. (NSE, India). SEC Chairman Mr Faruq Ahmad Siddiqi was the chief guest in the program.

In his speech, he told we need financial derivative products to manage risks in the capital market; as such products would give different investment opportunities and surely increase the confidence of the investors. In his speech he also hoped that this training had helped a lot to understand the products by the participant, as was the feedback uttered by the participants during their feedback session in the same occasion, and assures that we are getting ready for this product and should make no delay. He also assured that CSE would do follow-up sessions in the coming days in Chittagong, Sylhet and other places so that there is a better understanding about these products by all the market participants, and the market gets ready for it when we would introduce such products.

Mr. Arup Mukherjee, Assistant Vice President of NSE India, in his speech said derivatives are the must products for Risk Management while investing in the stock market, and when there is any derivative on a stock, it increases the liquidity of that stock in the cash market resulting in the overall liquidity in the market. He also said that without derivatives, no capital market is complete and speculation is mingled in the cash market. He also shared NSE’s experiences and the benefits it obtained introducing derivatives in India.

Mr Faruq Ahmad Siddiqi, Chairman, SEC, thanked CSE for conducting this training session. In his speech he told that we need diversified products in the capital market and derivatives can fulfill the need. He also assured that SEC will consider derivatives seriously and hoped that SEC would check the legal provisions and would come up with the required regulations for such products.

Mr. A. B. Siddique, Chief Executive Officer of the Exchange, thanked everyone for making this program a success in his vote of thanks. SEC members, Mr. Saleh Ahmed Chowdhury, Mr. Mohammad Ali Khan, Mr. Mansur Alam, DSE Vice Presidents Mr. Sharif Ataur Rahman, Mr Ahmad Rashid Lali, directors of CSE and many others from the organizations operating in the capital market were also present in the occasion.

Welcome Address by the CSE President on the Closing Ceremony of “CSE-NSE Joint Certification Course on Financial Derivatives”

Honorable Chief Guest, my fellow colleagues in the Board, CSE members, distinguished guests and my dear Participants’ ….

Good Evening!

I am feeling good to see that this joint certification program with the National Stock Exchange of India (NSE) has come to its successful end. In fact this is the beginning and this certification course is the first outcome of our series of workshops on developing awareness on introducing Financial Derivatives in our market.

As you may be aware, Risk is a characteristic feature of all commodity and capital markets. Prices of all commodities – whether agricultural like wheat, cotton, rice, coffee or tea, or non-agricultural like silver, gold, etc. – are subject to fluctuations over time in keeping with prevailing demand and supply conditions. Producers or possessors of these commodities obviously cannot be sure of the prices that their produce may sell in future, in the same way as the buyers are not

sure what they may have to pay for their purchase in future. Similarly, investors in the capital markets, those who hold shares and debentures, bonds or other securities are also subject to a continuous price risk. Those who are charged with the responsibility of managing money - their own or of others - are also exposed to the threat of risk. Risk is all prevalent and can happen any time. While risk can be anticipated by the parties, risk cannot be managed in the absence of risk management tools. Without risk management products, investors are left vulnerable to the vagaries of the markets. There is therefore clearly a need for having proper risk management tools to help investors, producers, commodity growers etc. Derivatives came into existence primarily to fulfill the need for having proper risk management tools.

A derivative instrument, broadly, is a financial contract whose payoff structure is determined by the value of an underlying commodity, security, interest rate, share price index, exchange rate, oil price, or the like. Thus a derivative instrument derives its value from some underlying variable. Derivative instrument by itself does not constitute ownership. It is, instead, a promise to convey ownership. Derivatives include forwards, futures or option contract of predetermined fixed duration, linked for the purpose of contract fulfillment to the value of specified contracts underlying.

The primary objectives of any investor are to Maximize Returns and Minimize Risks. Derivatives are contracts that originated from the need to minimize risk. In the market’s idiom, derivatives are “risk management tools” which facilitate hedging of price risk. The use of derivatives contracts as hedging techniques is a well-established practice in commercial and industrial operations the worldover.

Here I would like to quote Alan Greenspan, the former Chairman of the Board of Governors of the US Federal Reserve System: “By and far the most significant event in finance during the past decade has been the extraordinary development expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it - a process that has undoubtedly improved national productivity growth and standards of living.”

The history of derivatives is surprisingly longer than what most people think. Traces of derivative contracts can even be found in incidents that date back to the ages before Jesus Christ. The first formal 'futures' contracts can be traced to the ‘Yodoya’ rice market in Osaka, Japan around 1650. Derivatives have had a long presence in this sub-continent also. We even find the existence of the characteristics of derivative contracts in incidents of ‘Mahabharata’. The commodity derivative market started functioning in India since the nineteenth century with organized trading in cotton through the establishment of Cotton Trade Association in 1875. Since then contracts on various other commodities have been introduced as well. Exchange traded financial derivatives were introduced in India in June 2000 at the two major stock exchanges, National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE). There are various contracts currently traded on these exchanges. National Commodity & Derivatives Exchange Limited (NCDEX) started its operations in December 2003, to provide a platform for commodities trading.

The derivatives market in India has grown exponentially, especially at NSE. On a daily basis NSE trades around Taka 5,31,000 million in derivatives contracts which is over three times it’s cash market volumes. Single Stock Futures are the most actively traded contracts on NSE accounting for around 50% of the total turnover of derivatives at NSE. NSE has become the largest exchange in the world in trading of Single Stock Futures and third largest in Index Futures. With the introduction of derivatives, the underlying liquidity of the cash market at NSE has increase and the volatility has reduced creating a much more healthier market.

Bangladesh Capital Market will have a new dimension in the near future when adding “Derivatives” with the existing equity products. Bur for this we may need to have some reforms in our existing policies and rule & regulations. I am confident that honorable SEC Chairman will give due consideration in this regard.

Dear Participants, I am confident that during the course you have learned a lot about derivatives from Mr. Arup Mukherjee of NSE India, who took all the trouble to come here from Bombay. And I am sure that now you are ready to take the lead with the launching of the product, and we must have to do it soon.

Thank you all

MKM Mohiuddin
President