NSE launches both US benchmark indices today.
Trading in the two US benchmark indices, the S&P 500 and Dow Jones Industrial Average (DJIA) futures, may be low in the initial stages, said market experts.
Given the uncertainty in the US, the two indices which are being launched at the National Stock Exchange (NSE) tomorrow, are likely to get a cautious welcome from Indian market players. The absence of foreign institutional players and non-resident Indians, who could have given fillip to the trade in these indices, is being cited as another reason for a slow opening. At present, trading in derivatives on the global indices is restricted to Indian residents only.
The new contracts will include futures on both the Dow and S&P, and options on the S&P 500. Trades will take place during Indian trading hours. While the value of Dow and S&P would be derived from US contracts listed on the Chicago Mercantile Exchange (CME), both indices are to be denominated in the rupee.
Sandeep Singal, co-head of institutional equities, Emkay Global, said, “It is a good step. But since US markets will be closed when we trade, we need to see how many traders will be interested. Though the Dow futures’ trades round the clock, after the regular market hours, it has only passive participants. Since the US would not be open, you cannot do arbitrage."
As a market-building measure, NSE has decided not to levy a transaction charge on these till February 29, 2012. It has also conducted a mock trading session in DJIA and S&P 500.
Singal said it was important for exchanges with regional ambitions to provide a diversified suite of products. But interest in these products would rise when hedge funds get registered in India and they employed various strategies like long-short, etc, he added. "Small traders will get in only when the indices become actively tradable and arbitrage opportunities emerge," Singal said.
Domestic market conditions would not help matters. The key domestic benchmark indices, the Bombay Stock Exchange’s Sensex and the CNX S&P Nifty of the NSE are trading at two-year lows and the derivative trading interest is at a multi-year low if one looks at the open interest positions in index futures.
DOWN THE LINE
However, stock brokers also say the trading interest is likely to improve in the future, as it will allow domestic traders to hedge their risk in case of any major global event or to diversify the portfolio.
For instance, traders would like to take positions in the Dow and S&P in the event of a US credit downgrade or ahead of the Federal Reserve making any key announcement expected by markets, say analysts. Also, those with exposure to US markets in any particular sector like information technology would be in a position to hedge risk by taking positions in US indices in India.
Every trading member participating in trading in the contracts at any time during the above period shall be required to make a lump sum contribution of Rs 500 as contribution to the Investor Protection Fund, the NSE has said.
Last year in July, NSE launched dollar-denominated futures contracts based on the S&P CNX Nifty Index on the CME. Nifty futures are already being traded on the Singapore Stock Exchange since September 2000. Similarly, the BSE's Sensex is available for trading in the Eurex derivative exchange.
