Sensex futures off to a good start in US

May 22, 2008
Ashish Rukhaiyar & Shailesh Menon
MUMBAI

ALL attempts by the Bombay Stock Exchange so far to boost volumes in its equity derivatives segment have been a flop. But all may not be lost yet. There are signs of interest in Sensex futures, being traded on the US Futures Exchange, picking up. It is too early to say if the interest can sustain, but the development will certainly provide some solace to the shareholders and the top brass of BSE who are hoping for better valuations for the bourse ahead of its impending public issue.

Sensex futures made their debut on the USFE on April 4 this year. The initial response to the product was tepid, and trading volumes were abysmally low. But that now seems to be changing gradually. The number of traded contracts is increasing on a daily basis and there have been days when it has been in the range of 150-200 contracts.

According to Bloomberg data, Sensex futures on USFE witnessed activity for the first time on April 24 when 64 contracts were traded. This rose to 264 contracts on the very next day (April 25). There have been at least six trading sessions when more than 100 contracts were traded on a single day. The contracts have a notional value of $40,000 and a tick value of $10. The clearing and settlement is done through The Clearing Corporation, Chicago.

Experts attribute the trend to market makers that are trying hard to push up the volumes in the early stages so as to attract more players in the coming days. However, they add that it is difficult to predict the actual level of interest among investors.

“One reason for rising volumes in BSE futures could be because market makers are getting into the act to prop up volumes,” says Angel Broking derivative analyst Siddarth Bhamre. “This is evident from the fact that open interest positions on Sensex futures is very less compared to trading volumes. Though intraday trading volumes are high, no trader is really willing to carry forward the contracts,” he added.

Meanwhile, in an email response, a USFE spokesperson said they have “seen a wide range of market participants trading the Sensex contract (that include) market makers — small and large — to prop shops, investment firms and retail traders”. These Sensex futures offer overseas investors a slice of the action in India without actually getting registered in India with the regulator.

“There is great interest for locally-listed (Indian) instruments in overseas markets, a fact, that is very relevant from rising trading volumes of Sensex futures on the USFE,” said Gautam Chand of Instanex Capital. “If one looks at the trading pattern, Indian equity trading abroad is almost $15 billion per month compared to local FII trading of $32 billion per month. About 32% of value is traded outside India in the form of trades in GDRs, ADRs, futures and ETFs,” added Mr Chand.

There is also a section of market players that attributes the trend to Sebi’s decision of banning FIIs from issuing participatory note (PN) with equity derivatives as the underlying to their overseas clients. Incidentally, Singapore Stock Exchange (SGX) also reported a sudden spurt in trading volumes of Nifty futures after the Sebi diktat.