India’s ranking in the global exchange-traded derivatives market continues to rise. According to latest volume rankings for the first half of 2010 by the Futures Industry Association (FIA), National Stock Exchange (NSE) of India’s ranking has improved by two places and it’s now the fifth largest derivatives exchange in the world. According to FIA’s league table, NSE now ranks higher than Chicago Board Options Exchange and the Nasdaq OMX group. How can this be?
Well, FIA’s rankings are purely based on the number of contracts traded. The value of NSE’s contracts is far lower in comparison to the American exchanges, and hence the ranking based on volumes doesn’t make much sense. Also, NSE’s ranking has got a boost with the addition of the currency futures segment, where each contract is valued at just $1,000, far lower than even Nifty contracts, which are valued around $5,500. The currency futures segment accounted for about 50% of total contracts traded on NSE in the first six months of this year, compared with just 15% in the same period last year. For perspective, the average contract size of stock index futures contracts on the Chicago Mercantile Exchange stood at around $5,5000 per contract, according to data collated by the World Federation of Exchanges (WFE).
FIA, in an online seminar, conducted last month to discuss volume trends in listed futures and options markets, repeatedly referred to the relatively small size of derivatives contracts in Asian markets. FIA does not provide rankings based on turnover data. Nevertheless, it pointed to some interesting data collated by the Bank for International Settlements, which shows that the listed market for futures and options on equity indexes in Asia-Pacific is now larger than that in North America, even in terms of notional turnover. In the quarter ended June, the notional turnover of equity index futures and options on Asia-Pacific derivatives exchanges stood at $25.39 trillion. During the same period, derivatives exchanges in North America had a turnover of $22.67 trillion in these products. Asian markets had a share of around 40%, while the share of North American markets was lower at 35.6%.
Since this data pertains to turnover in value terms, it gives some credence to the view that Asian exchanges including NSE are giving serious competition to the world’s top exchanges in attracting business, at least in the equity derivatives space. But while that statement may be true for Asian exchanges in general, it may not be for Indian exchanges—at least, not yet. According to WFE data, Korea Exchange, the world’s largest exchange in volume terms, accounted for around 63% of total turnover in equity index futures and options in the Asia-Pacific region in the first eight months of this calendar year. NSE accounted for just 7% of turnover in the region, less than Hong Kong Exchanges and Clearing’s share of 10.4% and Osaka Stock Exchange’s share of 8.3%.
While in volume terms, NSE’s Nifty options contracts are ranked as the world’s third largest equity index derivative product, in value terms the picture is quite different. WFE doesn’t provide notional turnover data for all exchanges, but just for comparison, it’s important to note that Nifty options turnover is only around an eighth of the turnover at Korea Exchange.
Having said that, Nifty contracts were introduced much later compared with other established equity index contracts and they have a long way to go. With these contracts now being listed on Chicago Mercantile Exchange and Singapore Exchange, turnover is likely to increase further. As one FIA executive noted during its online seminar mentioned earlier, already more Nifty futures contracts are traded on the Singapore Exchange than futures on the MSCI Singapore index.
Indian exchanges now need to work at building liquidity in the single stock options market, which hasn’t taken off even though it’s been over nine years since its launch. It’s tempting to rest on laurels such as the high rankings in FIA’s league tables. But it is premature to say that India’s equity derivatives market has matured. It has certainly grown by leaps and bounds, but there’s much room for improvement in product innovation and attracting new participants. And as is evident from the notional turnover data, there’s ample room to grow in size as well.
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