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Citibank, Merrill Look To Pioneer Indian OTC Equity Mart

Citibank and Merrill Lynch are racing to become the first to offer over-the-counter derivatives on Indian stocks and expect to hit the market in the next six to 12 months. "We want to be the first to bring this out," said an official at Merrill in Mumbai.

Both firms are currently discussing launching the products with the National Stock Exchange of India, which is also the regulator. The exchange launched single-stock futures in November, and it is the expectation that these will develop into a liquid market that is driving discussions between the banks and the exchange, the Merrill official said. The exchange also plans to launch a warrant market in the next six months.

Merrill hopes to receive approval from the exchange within six to 12 months. The regulator did not return repeated calls.

However, rival derivatives professionals fear it could take longer. Srinivasan Varadarajan, treasurer at J.P. Morgan in Mumbai, said, "one year is being optimistic," and an official at Credit Suisse First Boston in Mumbai added, "this is a long way away." Both predicted the exchange would eventually allow OTC equity derivatives, but said it would be nearer 18 months to two years.

Citibank is also looking to venture into the market and will start by offering reverse convertible notes, according to a marketer in Mumbai. "We hope to launch this within six months to a year," the marketer added. A reverse convertible is the synthetic equivalent of an investor buying a bond and selling an equity put. The premium investors earn from selling the put is used to beef up the coupon on the bond.

HDFC Mutual Fund in Mumbai, with USD800 million in assets under management, is interested in equity-linked notes, according to a fund manager. However, he does not fully understand the risk/reward profile and would want more information before investing. He estimated the process of educating fund managers about the notes would take about a year.

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