Stock market regulator Securities & Exchange Board of India (Sebi) has widened the scope of index-based options by allowing exchanges to offer option contracts based on Sensex and Nifty with a tenure of up to five years. In January, 2008, Sebi had extended the period to three years. The share of index-based options in the total derivatives volumes has risen from around 10 per cent three years ago to 45 per cent in 2009-10 on the National Stock Exchange (NSE).
This year, the share has gone past 50 per cent. Analysts attribute this to volatility and the fact that options are a better tool to hedge risks than futures contracts.
“The move will widen the market. However, at the moment, only a few negotiated deals are happening in the long-dated options market. It will be a facility for investors with a long-term view who want to hedge their positions or take a long-term call,” said Edelweiss Securities Head (Quantitative Research) Yogesh Radke.
At present, short-end contracts dominate the derivatives markets and account for around 90 per cent trades on NSE. “The move may drive over-the-counter (OTC) market volumes back to the exchange,” added Radke. Other market players also welcomed the move and said it would bring more transparency.
OTC options contracts are negotiated outside the exchange and are private deals between parties. These will be a boon for institutional investors such as pension funds and insurance companies which have taken bets on the market and want to reduce risk, according to a stock exchange executive.
He added liquidity in such products would be enhanced only when such institutions were encouraged to participate in the segment.
Sebi said exchanges could launch such contracts provided there were eight semi-annual contracts maturing in June or December. In addition, three monthly and quarterly contracts that expire in March, June, September or December have to be offered.
The exchanges will also have to put in place a risk management framework for these contracts.
The Sebi board had approved the introduction of such contracts on March 6 this year. The decision was taken following a proposal by the derivatives market review committee.
“The growth in turnover of long-dated options is greater than that of short-dated options. With the market having gained sufficient experience in longer tenure options, it is recommended that options with tenures of up to five years may be considered for introduction,” said the committee report.
Securities and Exchange Board of India
CIR/DNPD/ 2 /2010,
Dated: May 4, 2010
Recognized Stock Exchanges and their Clearing Corporations / Clearing Houses
Sub: Introduction of Index options with tenure up to 5 years
This is in continuation of SEBI circular SEBI/DNPD/Cir-34/2008 dated January 11, 2008 regarding introduction of Index options with tenure up to 3 years.
2. It has now been decided to permit Stock Exchanges to introduce option contracts on Sensex and Nifty with tenure up to 5 years subject to the condition that;
a. There are 8 semi annual contracts of the cycle June/December in sequence to 3 serial monthly contracts and 3 quarterly contracts of the cycle March/June/September/December.
b. The Exchange has in place the appropriate risk management framework for such derivative contracts.
3. This circular is issued in exercise of the powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act 1992, read with Section 10 of the Securities Contracts (Regulation) Act, 1956 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
4. The circular shall come into force from the date of the circular.
5. This circular issues with the approval of the competent authority.
6. This circular is available on SEBI website at www.sebi.gov.in., under the category “Derivatives- Circulars”.
Derivatives and New Products Department