F&O market size within global norms, says NSE

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Market participants in favour of making stock futures and options compulsorily deliverable on the ground that huge derivatives to cash volumes “skew” the market, should consider the premium turnover of options instead of their notional turnover while estimating the size of the derivatives segment, a few NSE officials said on the sidelines of the exchange launching its commodity derivatives segment on Friday.

If the premium, rather than notional, turnover is considered, the overall derivatives-to-cash ratio would fall at or within 3, which is the global norm, said one of the officials. ET data for September indeed show that the average daily ratio was almost 34 if notional turnover of index and stock options is considered. But it falls sharply to 3.01 if premium turnover of the options is taken.

Another official claimed that globally exchanges considered premium turnover for options and not their notional value. For example, the 10500 near-month Nifty call option costs Rs 126 a share (75 share make one contract). The premium value is 126X75, or Rs 9,450, while notional value is 75(10500+125) , or Rs 7.97 lakh.

Market regulator Sebi, through a circular in April, made delivery in 46 stocks compulsory from the July 2018 expiry for not meeting the enhanced criteria — having an average daily delivery value of not less than Rs 10 crore for the past six months on a rolling basis, among others — for being part of the derivatives segment. Sebi said it would make physical settlement of stock futures mandatory in a phased / calibrated manner to better align cash and derivatives markets.

This has resulted in expectation of all 210 active stock futures being made compulsorily deliverable. A Sebi official was not immediately available for comment.

Some brokers, speaking on condition of anonymity, said that making derivatives’ compulsory delivery would curb manipulation. They cited the 71 per cent overnight fall in the stock of e-commerce company Infibeam on September 28 on rumours of accounting practices at the firm allegedly propagated through a WhatsApp message. Huge long liquidation on the stock’s derivatives caused the price plunge.

However, another broker added that stock derivatives were a hedging tool for those holding actual stock, while speculators who traded without holding the underlying share imparted liquidity to the counter by taking on the risk of the hedger. Making stock futures’ compulsory delivery would result in traders rolling over their contracts before expiration.

The NSE launched its commodity derivatives segment on Friday, offering futures on gold kilo, gold mini (100 gm) and silver (30 kilo) with Ahmedabad as delivery centre. Vikram Limaye, MD & CEO, NSE, said crude and copper futures were in the pipeline pending Sebi approval. Limaye told ET that since NSE held nearly100 per cent of the equity derivatives market, 85 per cent of the equity cash market and 60 per cent of the currency derivatives market, it could leverage its strength to deepen the commodity derivatives segment.

Source: Economic Times