Exchanges eye index derivatives with new stock additions in limbo
Market players await new policy around F&O stock inclusion
Stock exchanges are expanding the buffet of index derivatives even as the number of stocks permitted to trade in this space, generating an average daily turnover of ~450 trillion, is shrinking.
This week, the National Stock Exchange (NSE) started issuing futures and options (F&O) contracts based on the Nifty Next 50 Index, bringing the total count of index derivatives to five. The exchange, which generates one of the highest F&O volumes globally, already offers trading in derivatives based on the Nifty 50, Nifty Bank, Nifty Financial Services, and Nifty Select Midcap indices. Meanwhile, BSE offers index derivatives contracts on two indices — the Sensex and the Bankex.
Sources said the bourses are looking to add even more products to the derivatives space as the competition among them heats up while generating growth on an already higher base becomes a challenge.
However, their proposals are hitting a wall, with not even a single new stock getting added to the derivatives space since January 2020, while some of the existing ones are being weeded out.
At its peak, NSE offered F&O contracts on nearly 200 stocks. At present, the list is down to 182.
According to rules, companies that are allowed to trade in the F&O segment are only eligible to be constituents of the index. Consequently, exchanges are unable to add some large or newly listed companies such as Dmart, Zomato, Jio Financial Services, and Life Insurance Corporation of India to any of the indices that trade in the derivatives segment.
“It is impossible to have an index trade in derivatives which have nonf&o stocks. While on one hand, exchanges want to take the relatively less volatile index derivatives route to expand their derivatives presence, they will be unconstrained unless the regulator starts allowing new stocks to the derivatives space,” said one broker.
Market regulator Securities and Exchange Board of India (Sebi) is expected to float a consultation paper over the next few weeks proposing fresh criteria for the inclusion of stocks in the derivatives segment. While the framework was expected a year ago, the regulator has been cautious amid concerns that the derivatives segment is encouraging excessive speculation and attracting gullible retail investors.
Sources said a panel composed of officials from Sebi and the Reserve Bank of India has been deliberating ways to address concerns around rising retail participation, monitoring mechanisms, and criteria for selecting stocks eligible for the derivatives segment.
While new methodologies for calculating eligible stocks are in the works, other factors like risk management for clients and traders might also be addressed in the consultation paper that will follow.
Moreover, one of the stock exchanges has already started conducting sessions with trading members or stockbrokers to explain and create awareness of new methodologies for open interest, also known
At its peak, the NSE offered F&O contracts on nearly 200 stocks. At present, the list is down to 182
as the delta equivalent open interest.
“Under the current framework, a stock may be pushed into the F&O ban period if some people take deep outof-the-money options contracts. The regulator may be more comfortable allowing more stocks in the derivatives if the approach is changed. A white paper will be published, and discussions will follow. It is still awaited,” said a person familiar with the developments.
According to regulations, a scrip is kept in the ban period to avoid excessive speculative trading in the derivatives segment.
Another person with knowledge of the developments said that a new methodology of ‘future equivalent’ is under discussion.
Last year, the market watchdog introduced a risk disclosure framework for stockbrokers, wherein they were directed to display and prompt traders to read the risks associated with trading in F&O.