Mumbai: BSE’s derivatives segment has remained a non-starter for close to a decade but its current management team hopes that innovations will help.
BSE adopted physical settlement in stock derivatives last year but this hasn’t worked because of a lack of an effective securities lending and borrowing system (SLBS), which will allow investors to hedge effectively.
Derivatives in India have traditionally been cash-settled, which means investors can place bets without having exposure to the underlying stocks.
Success in derivatives is critical if BSE has to grow its market share even in the cash segment, as many investors want an option to hedge their bets when they purchase equities. Recent initiatives such as market-making may provide a fillip to the segment, though.
“We have been stuck in a circular debate—delivery-based derivatives cannot succeed without stock-lending, and stock-lending is not taking off because cash-settled futures is easier,” said Sayee Srinivasan, head of products strategy at BSE. Besides, SLBS is a fundamental need in itself, he added.
Physical settlement and a revived SLBS is the key to BSE’s differentiated offering in derivatives. Brokers are still reluctant to play ball but BSE officials hope that with different kinds of trades possible, a new set of investors will adopt BSE’s derivatives platform and attract more investors.
An active SLBS will allow retail and institutional investors to lend stocks they have been holding for long and are not able to sell.
Physical settlement will allow such investors to write call options at a price they are willing to sell, and if the option is exercised they can dispose the stock. If it is not exercised, they can enjoy the premium.