Informist, Thursday, Sep 5, 2024
By Rajesh Gajra
MUMBAI – The BSE will retain weekly expiry options contracts on BSE Sensex index and remove those on BSE Bankex index if the proposal made by the Securities and Exchange Board of India in a recent consultation paper to restrict a stock exchange's weekly index options offering to just one benchmark index is approved, a senior official at the exchange told Informist. Similarly, the National Stock Exchange will retain weekly Nifty 50 index options and remove weekly options contracts on Nifty Bank, Nifty Financial Services, and Nifty Midcap Select indices, a senior NSE official told Informist.
The SEBI consultation paper, released on Jul 30, proposed that a stock exchange be permitted to provide weekly options contracts on just one benchmark index. The two exchanges are interpreting the use of the word 'benchmark index' in the consultation paper to mean an index which is broad-based, and one which is not a sectoral or thematic index.
SEBI's proposal was among a few other changes in the index derivatives framework, which the market regulator said, was needed to avoid market instability from black swan events and heightened trading volumes. At an event last week, Chairperson Madhabi Puri Buch said that SEBI has received around 6,000 responses from market participants on the proposals in the index derivatives consultation paper. Final recommendations will be made by SEBI to its board soon.
Within the existing regulatory ambit, the stock exchanges are free to choose the modalities, including expiry day, around broad specifications of their weekly derivatives contracts. Since BSE reintroduced weekly index derivatives contracts in May last year, the two exchanges have been shuffling the expiry dates of their weekly contracts "to the extent that as of now there is expiry of weekly index derivatives contracts on all five trading days of the week", the market regulator said in the paper.
Among the NSE and BSE indices on which weekly expiry derivatives contracts are available currently, Nifty 50's expiry day is on Thursday, while that for BSE Sensex is Friday, Nifty Midcap Select is Monday, BSE Bankex is Monday, Nifty Financial Services is Tuesday, and Nifty Bank is Wednesday.
If weekly options contracts are permitted on only one benchmark index per exchange, and given the fact that the two exchanges will retain contracts on their main indices, the NSE will stop offering fresh weekly options contracts in Nifty Bank, BSE Bankex, Nifty Financial Services, and Nifty Midcap Select indices.
The NSE recently launched monthly expiry contracts on Nifty Next 50 index. It did not get SEBI approval to launch weekly expiry contracts on this index. Apart from Nifty 50, the broad based benchmark equity indices on NSE are Nifty Next 50, Nifty 100, Nifty 200, and Nifty 500.
SEBI is keen on cooling investors' fancy for weekly expiry index options contracts with every trading day seeing at least one index's contracts expire. The market regulator said that large open interest and hyperactive trading activity was taking place close to expiry.
"If an extreme black swan event were to occur minutes before expiry, with heightened OI (open interest) and activity at stake, the potential stress to the ecosystem with those that are short options rushing to hedge in cash, futures, and/or options markets can be immense," SEBI said in the consultation paper. According to SEBI, the daily expiry of options contracts on different indices combined with hyperactivity around expiry posed significant risk to market stability, notwithstanding existing safety buffers in terms of margins and default management waterfalls.
No changes will take place in the monthly expiry index derivatives contracts of BSE and NSE. SEBI's proposals did not dwell upon these contracts.
Index options contracts, including weekly and monthly expiries, make up for more than 97-98% of total equity derivatives turnover on the exchanges. On the NSE, for instance, the average daily turnover in index options in the current financial year till Sep 4 was 361.44 trln rupees, or 98% of total equity derivatives turnover. Further, the index options turnover was 13% higher than that for the whole of 2023-24 (Apr-Mar). The exchanges do not disclose options turnover data on individual indices. End
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