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Lokeshwarri S.K.

The volume of contracts traded this March was less than half of that recorded in March 2008 and is at one-third of the peak volumes recorded in July 2008. That may be viewed with relief by the domestic stock exchanges, which saw the SGX as a strong competitor to their own transaction volumes. The SGX Nifty provides overseas investors with an alternative route to bet on the Indian markets.

The SGX Nifty futures saw a manifold increase in volume after October 2007, following imposition of curbs on Offshore Derivatives Instruments (ODIs) by SEBI. Some of the unregulated entities such as hedge funds, could not trade in Indian markets through ODIs after this ban and are believed to have shifted overseas to the SGX Nifty.

Monthly volumes on its contracts rose steadily from less than 20,000 contracts before the last quarter of 2007 to a peak of 16 lakh contracts in July 2008.

The tide has, however, turned since October 2008. The number of contracts traded between January and March 2009 ranged between 4,40,000 and 5,20,000, about one-third of the peak turnover. However, it is not just Nifty futures that saw a contraction in volumes on the SGX. Overall future trading volume on that exchange contracted 20.5 per cent in the quarter ended March 2009.

“Trading in the CNX Nifty futures shrank 51.1 per cent to 1.4 million contracts (in the quarter ended March 31, 2009), attributable to a muted interest in the Indian market,” says a statement on the SGX Web site. It needs to be noted that the number of Nifty future contracts traded on the domestic exchanges have held steady over the same period.

The sharp decline in off-shore trading activity after October 2008 can possibly be traced to hedge funds winding down their India exposures, following the severe global liquidity crunch after the Lehman bankruptcy. Hedge funds grappling with large-scale redemption requests in that period had to scale back their activity considerably.

The impact on SGX Nifty volumes was greater because India-specific hedge funds were among the worst performers in the rout.

According to a report published by HedgeFund.net, the index tracking hedge fund returns in India was down by 56.6 per cent in 2008. The report adds that the exposure of hedge funds to India has shrunk dramatically in the current melt-down, down to $6.1 billion in February, from $18.74 billion at the end of 2007.

It would, however, be wrong to conclude that hedge funds have lost interest in the Indian markets for good. After October 2008, when SEBI reversed some of the curbs imposed the previous year, some of the hedge funds may have opted to shift their trading to domestic exchanges again. Mr Siddarth Bhamre, Fund Manger – Derivatives and Equities, Angel Broking, concurs saying that, “We have been observing that this segment (hedge funds and FIIs) has started buying in cash market and their activity in F&O has also increased significantly. One strategy they appear to be adopting is to buy index futures and simultaneously buy put options to hedge that exposure. They have also been active in large cap single stocks futures. However, the incremental rise in activity is not just restricted to our markets and is seen in most of the emerging markets.”

Mr Bhamre also thinks that the fact that SGX offers only Nifty futures and not options could be one of the reasons why volumes have shrunk on that exchange.

More Stories on : Derivatives Markets | Foreign Institutional Investors

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