Sebi curbs to help boost BSE's Sensex options, says CEO

"The intention of BSE, notwithstanding the recent regulatory directives, (that) we have been regularly talking about is of deepening and broadening the market as our strategy for the year," Ramamurthy told investors recently after the company on Tuesday disclosed its September quarter earnings.

“An important point we were making was to make Sensex and Bankex products mature... Our efforts have been on (and) now it has got regulatory backing as well for us to promote them even better," Ramamurthy said in response to an analyst query on how the curbs would impact volumes

Ashishkumar Chauhan, MD & CEO of BSE’s larger peer NSE, had said in a statement earlier this month that disappearance of trading volumes from the weekly Bank Nifty and other weekly option series would "substantially" decrease overall option index volumes. Chauhan, too, was responding to an analyst query after the exchange's Q2 earnings on 4 November.

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Effective 20 November, BSE and NSE have been directed to offer just one weekly options expiry, according to a Sebi directive, as nine out of 10 individual traders lose money in index options trading. Other measures like an increase in contract lot size and value by three times from that date are expected to crimp trading volumes of index options, the most popular trading product.

BSE will offer weekly Sensex options and NSE will offer weekly Nifty options. While NSE offered four weekly options contracts—Nifty, Bank Nifty, Nifty Midcap Select and Finnifty—BSE offered two—Sensex and Bankex—until recently. Post the Sebi directive on 1 October, option contracts only on their benchmark indices will be available after 20 November.

The reason why BSE stands to be relatively less affected than NSE from Sebi curbs is that its Sensex weekly options are most liquid on expiry day, while traction is yet to pick up on non-expiry days and spread from weekly to monthly options eventually.

Nifty weekly options contract, on the other hand, enjoys higher liquidity even on non-expiry days and its monthly Nifty and Bank Nifty options enjoy healthy volumes. BSE's Ramamurthy is putting in efforts to enhance liquidity in Sensex options on non-expiry days and believes the Sebi directives will help in that endeavour, with only two contracts being available to traders per week against six earlier.

"As you would have seen in recent weeks, already there is some amount of traction we are seeing in the next week, next-to next week and the third week contracts in respect of Sensex. We are trying to build it by regularly talking to the market participants because we feel that a mature product has to go through that phase," he added.

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Ramamurthy believes that more mature option products will result in premium per contract in terms of size and the week of expiry being very "advantageous" for cost optimization at both the exchange and clearing corporation levels.

This is because whatever transaction fees are earned in options is based on premium turnover, while charges paid to the clearing corporation for clearing and settling trades are currently based on the number of contracts.

If the premium turnover per contract rises, transaction changes earned by the bourse will also increase.

The difference in the notional to premium turnover ratio between BSE and NSE is currently in the latter's favour with weekly Nifty options contracts being more mature, having existed for over five years. Notional turnover refers to the total or face value of the options contract, while premium turnover is the market value.

While the notional to premium turnover ratio for BSE was 1334 times in October, it was 631 times for NSE, based on average daily notional and premium turnover for the month.

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BSE's earlier efforts to gain traction in derivatives trading were not fruitful until Ramamurthy re-launched the Sensex weekly contracts in May last year.

Based on exchange data, BSE's market share in index options' premium turnover grew from zero in May last year to 12.7% last month, with NSE significantly ahead.