The recent Sebi directive on cross-margining has created a concern relating to the competitive position of the BSE. Since the BSE has not been as successful as its rival, the NSE, in promoting futures and options trading, the concern is that the introduction of cross-margining will provide a further competitive advantage to the NSE. The danger is that the dominance of Indian financial markets by a single exchange may lead to higher transaction costs and less innovation.

I have been following this debate from my office in Chicago, a city that is very familiar with competitive battles between futures and stock exchanges. During the past few years, I have witnessed the mega-merger of the Chicago Mercantile Exchange and the Chicago Board of Trade in the futures market, and the mega-merger of the electronic exchange Archipelago with the New York Stock Exchange in the equity markets. These events are but two examples of a pattern of consolidation that is taking place around the world as the technological foundations of financial markets have changed from a physical, open-outcry system to an Internet-based, electronic system. As we look to the future, it is not hard to envisage a world in which there is a single electronic exchange for all financial products: stocks, bonds, foreign exchange and their derivatives.

The primary obstacle standing in the path of this vision is a regulatory one. In the US, the difficulty of merging equity, futures and currency markets arises from the fact that these markets are subject to different regulatory authorities: the SEC, CFTC and the Federal Reserve. In a similar manner, national markets are segmented by the presence of their own regulatory authorities. While regulators may stand in the path of progress, they do so at the risk of impeding the competitive position of the markets that they deal in. From my office in Chicago, I can trade Indian stocks through ETFs on the NYSE and Indian rupees on Internet-based currency trading platforms. Furthermore, regulators and government officials are now very aware of the impact of open capital markets on economic growth. C B Bhave's initiatives at Sebi should be viewed as an important part of a general strategy aimed at improving the efficiency and competitive position of Indian capital markets.

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