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Informist, Wednesday, Nov. 6, 2024

 

By Rajesh Gajra

 

MUMBAI – The Securities and Exchange Board of India is in discussions with the stock exchanges to explore whether all index monthly futures and options can be aligned to expire on the same day for an exchange, according to two exchange officials familiar with the discussion. This would mean all index monthly options and futures would expire on only two days in a month – one for all contracts offered by the National Stock Exchange of India and one for all contracts offered by the BSE Ltd.

 

Currently, monthly index options expire on five days of the week of the last week for the NSE contracts and on two separate days for the BSE contracts.

 

The market regulator, which recently restricted weekly expiry index options contracts to two indices--NSE's Nifty 50 and BSE's Sensex--wants to ensure that the exchanges do not retain the flexibility to set any day of the month as an expiry day and potentially manoeuvre to have one monthly index option expiring every week of the month. This would potentially undo the restriction recently imposed by the regulator, which was aimed at reducing the trading volumes in the futures and options segment. The officials said SEBI may hence permit a stock exchange to choose only one day as the expiry day for all monthly index futures and options contracts it offers.

 

Currently, in the case of the NSE, monthly contracts on Nifty 50 futures and options expire on the last Thursday of each month, while those on the Nifty Bank expire on the last Wednesday. The Nifty Financial Services expire on the last Tuesday, the Nifty Midcap Select on the last Monday, and Nifty Next 50 on the last Friday. This effectively means a monthly index contract expires each day of the last week of the month in the case of the NSE.

 

On the BSE, currently monthly contracts on Sensex futures and options expire on the last Friday of the month while those on the Bankex expire on the last Monday.

 

The officials said they fear that SEBI may not only direct exchanges to have one common expiry date for all monthly index contracts but it could possibly also insist on having the monthly index contracts expire on the very same day as the weekly index contracts. This would effectively mean each exchange would have a single expiry day for all index contracts.

 

In the case of the NSE, the regulator could ask the exchange to fix the last Thursday, which is also the day on which the weekly Nifty 50 options expire, as the expiry day for monthly options and futures offered on all its five indices. Similarly, the BSE may be asked to move the Bankex monthly expiry from the last Monday to the last Friday which is already the expiry day for the Sensex weekly and monthly futures and options.

 

Subsequent to the recent measures announced by SEBI, the NSE has announced it will discontinue its weekly contracts in three indices -- Nifty Bank, Nifty Financial Services, and Nifty Midcap Select, while BSE has done the same for Bankex. From Nov. 20, weekly expiry contracts will be available only on Nifty 50 and Sensex derivatives contracts.

 

SEBI's talks with exchanges on the monthly expiries is in line with its objective of cooling down volumes on expiry day in index options. Expiry day trading volume had risen substantially in the last two years. SEBI is concerned that hyperactive trading activity with large open interest was taking place close to expiry, which exposed the market ecosystem to a potential crisis if an extreme black swan event were to occur minutes before end of expiry day and traders with short options rush to close their positions or hedge in the cash market. This, according to SEBI, could potentially destabilise the market despite existing safety buffers in terms of margins and default management waterfalls being in place.  End

 

Edited by Ashish Shirke

 

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