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BSE will launch an arbitrage product called cash futures spread (CFS) on August 6. This instrument will trade the price differential between cash and the futures market.
The exchange has already issued a circular detailing the clearing, settlement and risk management of cash futures spread.
“We will do mock trading on cash futures arbitrage from Wednesday (August 1) onwards,” said a BSE broker. “This product has the potential to revive the derivatives segment on the BSE,” he added.
For instance, once a person buys cash futures spread on RIL at Rs 5, the system automatically does two transactions at one go.
First, it sells one contract of RIL for this month’s expiry at Rs 732 (equal to the last traded price in cash segment, i.e., Rs 727) plus the spread of Rs 5)
It then simultaneously buys the RIL stock at Rs 727 (the last traded price of the stock).
Similarly, a person selling cash futures spread goes short on the stock at the last traded price (Rs 727) and long on the futures at Rs 732 (Rs 727+5).
Spread-lock
A single order locks the spread and hence the risk of punching in two orders and not being able to obtain the required spread is eliminated.
Participants also need not reverse the cash leg once a futures contract expires as F&O segment on the BSE is delivery-based. They can settle by delivering the stock on the exchange.
Participants will also avail themselves of cross margining benefits under extant regulation. As one CFS trade creates two offsetting positions (buy cash-sell futures or sell cash-buy futures), the benefit will be available until the trade pus two (T+2) day.
Even if one leg is squared off, margin will be applicable for the other leg according to the norms for that segment. That is, if the open leg is futures, the futures margins would apply and if it is cash, margins for cash segment would be applicable.
Doing cash futures arbitrage by executing two orders usually costs 35-40 per cent more.
This lowers cost as the number of transactions is one instead of two.
At the time of expiry, all outstanding positions on CFS will be physically delivered by delivering the underlying stock at the final settlement price.
The final settlement price is the closing price of the stock on the day of expiry.
Pay-in and pay-out will happen three business days after expiry of the contract (E+3).
On Tuesday, derivatives volume on the BSE, clocked Rs 51,170 crore. Of this, index futures constituted Rs 742 crore and stock futures Rs 2.6 crore.
raghavendrarao.k
@thehindu.co.in
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