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BSE, NSE to launch index-based derivatives trading

The country's two leading stock exchanges, the Bombay Stock Exchange and the National Stock Exchange, are ready to launch index-based derivatives trading, but are waiting for small amendments to be made by the government in Parliament.

The NSE is one step ahead than the BSE and is seeking Securities and Exchange of India's permission to launch a membership drive.

Says NSE Managing Director Dr R H Patil, ''We have kept ready the software after conducting necessary changes for this new trading segment and the installation of this new software at the members' firms will be started very soon.''

Dr Patil was confident of getting SEBI's nod for membership drive for derivatives.

''Once we start our membership drive, we will conduct mock trading at the brokers' firms on this new segment,'' he said.

The BSE's meeting on Wednesday about the launch of derivatives saw members attending in large numbers. The BSE has set up a special cell to educate its members on derivatives trading.

The LC Gupta Committee on derivatives had submitted its report to SEBI which approved it and sent it to the finance secretary for certain amendments to be made by Parliament.

Dr Patil said that derivatives trading are new to Indian stock markets, but options originated in India. He said the NSE is getting overwhelming response from the traditional brokers for this segment.

According to documents prepared by the Indira Gandhi Institute for Research and Development, Bombay, index-based contracts attract a much more substantial order-flow, which helps them have tighter spreads.

''At a more basic level, we say there is less asymmetric information in the index (as opposed to securities, where insiders typically know more than others), which helps index-based trading have better liquidity,'' he said.

At settlement, in the case of security-options, there is the possibility of delivery, and in that case arises the question of depository versus physical delivery. Both alternatives are quiet feasible. However, in index-based contracts, that question does not arise since all index-based contracts are cash-settled.

The report also stated that the index has much less volatility than individual securities. That helps index-based futures which can work with lower margins.

The most important difference between the index and individual securities concerns manipulation. Given that an index is carefully built with liquidity considerations in mind, it is much harder to manipulate the index as compared with the difficulty of manipulating individual securities.

UNI