In a bid to bring back some of the lost zing, the markets regulator, the Securities and Exchange Board of India (Sebi), is looking to extend the trading hours for the derivatives market. Sources said Sebi was considering if trading in index futures could be kept open even after the cash market closed. The move will provide investors the tool to price in news flow that comes after market hours.
Currently, a lot of foreign investors use global platforms such as the Singapore Stock Exchange (SGX) and the Chicago Mercantile Exchange (CME) —which offer almost round-the-clock trading on some Indian contracts — for trading or hedging their underlying exposure to Indian stocks.
“Extending derivatives market timing would be a great idea. Our market should be open whenever customers want it to remain open. Given the current setting, there is a crisis on the international competitiveness of the Indian exchanges. A decade ago, nearly 100 per cent of the trading on Indian underlying used to take place domestically. Half of that has now gone to overseas locations. Our index, currency and interest rate derivatives are all getting traded overseas, which is a big problem. Extending timing is one element which can help us tackle this issue,” said Ajay Shah, senior
fellow at the National Institute of Public Finance and Policy (NIPFP).
Since allowing derivatives trading in 2000, the trading timings of both futures and options (F&O) and cash market have remained linked.
Sebi has undertaken a review of the equity derivatives market and floated a discussion paper on this last month. Sources said key feedback received by Sebi was that derivatives trading, particularly index futures, could be delinked and allowed to trade beyond cash market hours.
The Nifty futures — the most-traded domestic equity derivatives contract — clock more turnover in the overseas market than on the National Stock Exchange (NSE).
Market experts, however, say the extension of market timings could be a key factor in enhancing India’s international competitiveness. Other critical elements are taxation and accessibility. Market players say global financial centres such as Singapore and Dubai are more tax friendly, as they don’t impose a securities transaction tax (STT) and a stamp duty, which are levied by India. Also, they have far more friendly accessibility norms for overseas investors.
Despite a high cost structure, the Indian derivatives market has managed to develop rapidly in a short span. Experts say Sebi should take steps to ensure sustainable growth. “The Indian equity derivatives market is one of the success stories of financial market development in India and clearly, it makes sense to study this market to draw lessons that could help replicate this success in other segments that have remained under developed after 25 years of reforms,” said J R Varma, professor at the Indian Institute of Management, Ahmedabad (IIM-A), in a recent blog.
Sebi’s concerns
While acknowledging the rapid growth of India’s derivatives market, Sebi, in its discussion paper, has raised two main concerns. The prime concern is whether small investors are getting drawn into the derivatives space without understanding the risk. It has also questioned whether the derivatives market turnover is too high compared to the cash turnover. Broking players said current regulatory requirements, such as signing the risk disclosure document, which highlights the risk involved in derivatives segment, were working well but can be further tweaked. Brokers say they are already seeking financial details from clients to check if they have the risk-taking ability to deal in derivatives.
“The risk-profiling can be improved further but hardly 10 per cent of our retail clients opt for derivatives,” said a broker. In terms of high derivatives turnover, market players said the derivatives turnover vis-à-vis the cash market turnover looked abnormally high at 15 times as the F&O turnover was calculated on a notional basis.
“If the actual derivatives turnover is looked at, it is just three times the cash turnover, which is healthy. Also, the derivatives market is
structured in such a way that there tend to be many more transactions. There are operational difficulties in the cash market due to restrictions on margin facility or liquidity in the stock lending and borrowing mechanism (SLBM) used for shorting. This forces a lot of investors to trade in the derivatives market,” added the broker quoted above. An email sent to Sebi seeking response remained unanswered.
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