Market participants wary of products beyond sectoral indices3 min read . Updated: 10 Feb 2015, 12:44 AM IST
Bourses' attempts to boost derivatives offerings fall short as participants seem wary of products beyond benchmark indices
Mumbai: Attempts by stock exchanges to boost their derivatives offerings have not been successful as participants appear wary of products beyond the benchmark indices.
There are a total of 19 indices on which derivatives trading is offered by the BSE and the NSE, according to data listed in the latest monthly bulletin released by the Securities and Exchange Board of India (Sebi).
Apart from sectoral indices, the two exchanges also offer contracts on FTSE100, S&P500, Dow Jones Industrial Average, Hang Seng and Brazil’s Bovespa.
Derivative trading on indices refers to availability of futures and options (F&O) contracts with a particular index as the underlying measure.
While NSE offers F&O contracts based on 10 indices, only those linked to Nifty and Bankex account for almost all of the volume. There have been few takers for contracts based on sectoral indices.
On an average, NSE’s F&O segment has a daily turnover of ₹ 2-3 trillion and, as per the Sebi data, Nifty contracts account for over 85% of this, with the rest accounted by contracts based on Bank Nifty index.
Till a year back, derivatives on overseas indices did register a token volume, but it has almost dried up in the last few months.
Interestingly, on 26 February 2014, NSE launched futures on its volatility index called VIX, which has still not seen significant volumes. Between August and December, average monthly turnover of VIX futures was only ₹ 16 crore, Sebi data show.
There are structural issues with VIX futures as the lot size and margins are high with only weekly contracts available, making rollovers expensive, said Siddharth Bhamre, head, derivatives and technical research, Angel Broking Pvt. Ltd.
Globally, the VIX index of Chicago Board Options Exchange Market (CBOE) is the most popular volatility index and measures the implied volatility of S&P 500 index options. Data on the CBOE website show that there is significant investor interest for this product, with open interest typically over 200,000 contracts.
While interest in VIX futures in India will be visible during volatile times, market is still getting used to some of the anomalies related to its calculation methodology and settlement calendar, according to Bhavin Desai, associate vice-president of equity derivatives, Motilal Oswal Financial Services Ltd.
Responding to an email, an NSE spokesperson said almost all tradable indices on NSE have seen open interest in the recent past, “which is commendable, considering the total population involved in capital market is not very large in India".
Apart from Nifty, Bank Nifty and VIX, derivatives based on indices like CNX-IT, DJIA, FTSE100, Nifty Midcap 50 and S&P500 also saw some amount of trading in January, the spokesperson said. For any index derivative to succeed, elements of liquidity, volatility and predictability are required, which will boost investor confidence in the product, thereby generating significant volume, Bhamre said.
The scenario is similar on BSE as well, since Sensex derivatives account for 100% of the segment turnover even as there are eight other indices available for trading, as per Sebi data.
In December, the average daily turnover of Sensex contracts was nearly ₹ 1 trillion.
“Liquidity is the biggest issue with derivatives based on sectoral indices. Not that people are not interested, but only when a large set of investors come in and generate some liquidity, then the next set will follow," said Desai, adding exchanges are putting in efforts to popularize the products with regular interactions with market participants.
Trading on the BSE, however, is fuelled by a market making scheme in which members get incentives for trading in a particular index-based derivative.
In the one year period till May 2014, the BSE100 contracts accounted for a major portion of the total turnover as the scheme was applicable on that index. This is also corroborated by a relatively low open interest-volume ratio hinting a higher dependence on day traders. Open interest refers to outstanding contracts at end of the day.
In an emailed response, a BSE spokesperson said the average daily turnover has been inching up and the pay-out per crore of turnover has been on a declining trend. In the fourth quarter of 2011-12, ₹ 2,496 was paid as incentives for every ₹ 1 crore of turnover, which has come down to ₹ 24 in the corresponding quarter of the current financial year, said the spokesperson.