The new launch by the NSE of weighted indices in order to sell products that provide sector exposure and

diversified risks are welcomed to those advocating diversified and innovative products. Indeed we will see increased market liquidity as these products are taken up by investors, especially foreign levered capital. The currently proposed Exchange Traded Funds will provide greatly required diversified market exposure. ETFs are quite simple really. An issuer will raise capital (equity) in a fund that offers returns as a function of an index. The fund then issues proportional shares to the capital raised at outset, if the fund is close-ended. If open-ended, a rebalancing is done on the open dates. These shares are then tradable on the exchange. Depending on how the trading floor is, investors will see if the net asset value of the fund (i.e. actual shares) is reflected in the price of the fund. If the NAV is above the ETFs market value, an investor would ordinarily sell out, and vice versa. At the end of day, the fund will publish its net asset value and closing price of shares for the next days business. Indeed this would be an uphill task for a direct market participant seeking similar exposure as every unit's price movement would require a corresponding rebalancing of the portfolio. With T+3days confirmation, such a portfolio would have a 3 day lag from the real market, if the portfolio is to have 100% tracking of the index: Simply IMPOSSIBLE! Thus ETF's are very much appreciated, specifically for those seeking market segment exposure (which is beneficial in averaging risk), such as mutual and pension fund managers. In the proposed ETFs, only upside returns are offered. This means that only on rise of the base index will positive returns on capital be booked. This limits alternative investment desks, especially with foreign capital seeking top-notch (alpha) returns. I am concerned about what kind of exposure would be provided in these ETFs. How will CMA enforce 100% tracking of basis indices by the ETFs issuer considering the T+3 lag in the real market? Are MarkTo-Market procedures been put in place and what kind of logistics will disbursements involve? Are capital reserves going to be put in place for this process? All in all, we are headed in the right direction. CMA should propose laws allowing shorting, so as to allow proper hedging of down-side risks. KRA should issue a directive before such funds are floated, as backdating taxes would be a cumbersome and almost impossible task. It is also worth noting that the basis indices that have been created should now permit financial engineers to use local market-based variables in the creation of market tradable derivatives