On May 04th SEBI allowed bourses to offer F&O trading up to 11.55 pm every day. This will require prior permission of the regulator and the exchange will have to first convince the regulator that it has the requisite technical back-up, surveillance and risk management systems to handle longer trading hours. This move will be effective from October 2018. What exactly is the purpose behind this announcement?
Avoid off-shoring F&O…
When the exchanges announced their decision to stop supplying live price feeds to other stock exchanges, the intent was quite clear. They wanted to put an end to the off-shoring of F&O volumes. Over the last 8 years there has been a consistent trend among the FIIs to prefer the Singapore Nifty (SGX Nifty) over the Indian Nifty futures. While the Nifty futures volumes were equally divided between NSE and SGX, the SGX enjoyed a much bigger open interest compared to the domestic bourse. By extending the trade timings up to 11.55 pm, the exchange can cover clients ranging from the Middle East, Europe, UK, Canada and the US. This facility is currently not available on the NSE and the BSE and that has been one of the reasons Indian markets have been losing futures volumes to global exchanges like SGX and DGCX. The idea behind extending trading timings for F&O is to convert these off-shore F&O volumes into domestic volumes.
It is not just about timings…
What the regulator and the exchanges need to also realize is that the loss of volumes is not just about longer trade timings. That is just one of the factors. For example, trading SGX Nifty futures has two distinct advantages for the foreign portfolio investors (FPIs). Firstly, the SGX Nifty Futures are denominated in dollars and so the FPIs do not have to worry about dollar hedging. When they trade futures in India, they need to also take care of the currency risk and it has to be hedged based on a net exposure basis. Secondly, the cost of trading SGX Nifty futures is much lower due to the absence of multiple levies like GST, stamp duty and STT on F&O trades. These transactional merits are something Indian exchanges will have to replicate if they really want to draw volumes back to Indian bourses.
How pragmatic is this move?
How pragmatic would such a move be? Exchanges will have to literally run a 24-hour operations cycle to handle all the risk and back office requirements. The brokers will have a bigger challenge, especially the Indian brokers where the operations are still manpower intensive. These kinds of timings may not really be practical for them. If this is only targeted at foreign investors, then the ideal way would be to draw them to the GIFT City module, which will actually be like hitting two birds with one stone!
