Even as the number of stocks allowed to trade is shrinking with an average daily volume of Rs 4.50 lakh crore, stock exchanges are expanding the scope of index derivatives.
This week, the National Stock Exchange (NSE) started issuing futures and options (F&O) contracts based on the Nifty Next 50 index, taking the total number of index derivatives to five. The exchange, one of the world’s leading exchanges by F&O trading volume, already offers derivatives trading based on Nifty 50, Nifty Bank, Nifty Financial Services and Nifty Select Midcap indices. Meanwhile, BSE offers index derivatives contracts on two indices (Sensex and Bankex).
Exchanges are looking to add more products in the derivatives space as competition within the derivatives market intensifies, while growing from an already high base has become a challenge, sources said.
However, their proposal has hit a snag, not even a single new stock has been added to the derivatives space since January 2020, while some existing stocks are being phased out.
At its peak, NSE offered F&O deals on around 200 stocks. Currently, the list has been reduced to 182 people.
As per rules, only companies authorized to trade in the F&O sector are eligible to be constituent stocks of the index. As a result, the exchange could not add some large or newly listed companies such as DMart, Zomato, Jio Financial Services and Life Insurance Corporation of India to any index traded in the derivatives space.
“As index trading is not possible in derivatives with non-F&O stocks, on the other hand, exchanges may want to take the less volatile index derivatives route to expand their derivatives business, unless regulators start allowing new stocks in derivative products. They will not be restricted,” said a broker.
Markets regulator Securities and Exchange Board of India (Sebi) is expected to issue a consultation paper next week proposing new criteria for bringing equity into the derivatives space. While the framework was expected a year ago, regulators were wary of concerns that the derivatives space encourages excessive speculation and attracts unsuspecting retail investors.
Sources said a panel comprising Sebi and Reserve Bank of India officials is considering how to address concerns over growing retail participation, monitoring process and criteria for selecting eligible stocks for the derivatives space.
While new methods for calculating eligible shares are being studied, other factors such as client and trader risk management may also be discussed in subsequent advisory papers.
Additionally, one of the stock exchanges has initiated meetings with trading members or stock brokers to explain and raise awareness about the new procedure for open interest, also known as delta equivalent open interest.
“Under the current framework, a stock can be pushed into an F&O ban period if one holds out-of-the-money option contracts, but regulators may be willing to allow more stocks in derivatives. The white paper will be discussed later,” said a person familiar with the matter.
As per regulations, inventories are maintained during the lock-up period to avoid excessive speculative trading in the derivatives space.
Another person familiar with the development said a new “future parity” system was being discussed.
Last year, the market regulator introduced a risk disclosure framework for stockbrokers, which mandates them to display and prompt traders about the risks associated with F&O trading.
