BSE derivatives segment expires in June

All outstandings liquidated as June contracts end

The last embers of activity in futures and options (F&O) segment of the Bombay Stock Exchange (BSE) died out on Thursday, after all outstanding open positions were liquidated on the expiry of June contracts.

The average daily trading volumes on the BSE's derivative platform have always been low. The BSE's F&O segment reported average daily trades of Rs 180 crore in January 2004, which declined to Rs 37 crore in February 2004, and further to Rs 23 crore in March, Rs 4 crore in April and a modest Rs 2 crore in May.

Thus the derivatives segment on the BSE, which commenced trading ahead of arch rival, the National Stock Exchange (NSE), expired with not a single trade reported in all of June.

The death, which went unnoticed on account of some remaining outstanding positions in June contracts, came to light yesterday after the BSE reported zero outstanding open positions on Friday.

There has been no trading on the BSE's F&O segment in the last settlement cycle, from May 27 to June 24. A BSE spokesperson said, "The F&O segment has recorded nil trades in the past, but June is an exceptional case where there was not a single day's trade."

The sudden drop in operator and investor activity in derivatives in the last two months has hit a body blow to the BSE. The decline in F&O volumes is, however, not restricted to the BSE alone.

At the NSE, average daily volumes fell over 100 per cent between January and June 2004. Daily F&O volumes on the NSE steadily declined from Rs 14,432 crore in January to Rs 11,440 in March and further 7,189 crore in June 2004.

Several times in the recent past, the BSE failed to register a single trade in F&O. The BSE has put in place several measures, including market making to improve trading in derivatives but the biggest challenge has been generating sufficient volumes that would help generate volumes to sustain the tempo.

Since in this market, liquidity generates more liquidity, measures to generate smaller bouts of liquidity proved to be not very effective. In this background, BSE is now embarking on a more focused market initiative of promoting Sensex futures for it being a benchmark index apart from distinct and superior features in respect of constituent weightages, volatility, returns and, most importantly, free float method of index constructions.

BSE is now talking to several leading investors in India and abroad on enhancing their product basket by focusing exclusively on Sensex futures that not only helps them but also expands the scope of the derivatives market.

BSE has now opened a nationwide distribution network by offering deposit based membership in cash segment that would also be of great help in generating higher volumes in both the cash and the derivatives market.

Limitation on nationwide distribution network has been a major constraint for BSE in expanding its business nationwide, and with the introduction of deposit-based membership, it hopes to overcome this major challenge.