Feb. 4 (Bloomberg) -- Sri Lanka is in talks to form a partnership with the National Stock Exchange of India Ltd., including offering a stake in the island-nation’s bourse, to introduce derivatives in the country.

Sri Lanka wants to start trading stock derivatives by the end of the year and is in the process of setting up a central clearing corporation, said Channa de Silva, director general of the nation’s Securities & Exchange Commission. The commission hasn’t reached any agreement with the Indian bourse, he said.

“This will help boost volumes and give investors an opportunity to hedge their trades and allow them day-trading opportunities,” de Silva said in a telephone interview today.

Sri Lanka’s Colombo All-Share Index has rallied 20 percent this year as the army’s key victories against the rebel Liberation Tigers of Tamil Eelam spurred optimism the civil war is coming to an end. The benchmark index’s gains are the most among the 90 measures worldwide tracked by Bloomberg.

More than 200 companies trade on the Colombo Stock Exchange. Sri Lanka has a market capitalization of $5.14 billion, the smallest among the 16 equity markets in Asia, according to data tracked by Bloomberg.

A partnership with the National Stock Exchange may include a technical tie-up and allow the Indian exchange to take a stake in the local bourse, he said.

The National Stock Exchange said in an e-mail that it wouldn’t comment.

The regulator will also review its rules for mergers and acquisitions and is automating its surveillance systems, de Silva said, declining to be more specific.

To contact the reporters on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net; Chen Shiyin in Singapore at schen37@bloomberg.net.

Last Updated: February 4, 2009 04:40 EST