The BSE has decided to change the weekly expiry of contracts to Monday from Thursday in its equity derivatives segment from June 29. However, all other contracts (other than weekly contracts) would continue to expire on the last Thursday of the calendar month, BSE said in a statement. Currently, BSE has allowed derivatives trading in over 140 stocks and indices.

By shifting the settlement day, BSE is perhaps trying to attract market share in a segment which is currently completely dominated by its rival NSE.

According to BSE, equity derivatives clocked just ₹0.51 crore turnover on June 11 that too thanks to index futures. Options on index and stocks and stock futures did not elicit any interest from traders on the BSE. In contrast, turnover the NSE on June 11 was ₹31.64-lakh crore that includes the notional value of options trading.

Historical race

After the SEBI-constituted JR Varma committee in 1998 suggested a methodology for risk containment measures for derivatives trading in India, the market regulator gave its nod for the exchanges to launch derivatives trading in India.

The BSE was the first to introduce derivatives trading in India on June 9, 2000, by launching futures on its flagship index BSE Sensex. Later, it commenced trading on index options (Sensex) on June 1, 2001; stock options were introduced in 31 stocks on July 9, 2001, while single stock futures entered the BSE bourse on November 9, 2002.

The NSE commenced trading in derivatives with the launch of Nifty futures on June 12, 2000, three days after the official launch of the Sensex futures. Nifty options, launched on June 4, 2001, was also after the BSE launched its Sensex option series. However, NSE became the first exchange to launch trading in options on individual securities from July 2, 2001. Futures on individual securities were introduced on November 9, 2001, one year ahead of BSE.

The NSE was also the first to launch weekly options through Bank Nifty from May 27, 2016. However, it introduced the weekly options on Nifty index only on February 19, 2019. The BSE introduced weekly F&O on stocks in equity F&O from September 19, 2019.

No rolling settlement

When F&O was launched in 2000, Indian bourses were settling trades on fixed-day weekly basis. There was no concept of rolling settlement at that time. The BSE had its settlement cycle from Monday to Friday for the cash segment. This meant that all trades that took place between Monday and Thursday had to be settled (delivery of shares to the buyers and payment of cash to the sellers) on the subsequent Friday. Similarly, on the NSE, trades had to be settled on every Tuesday.

According to market veterans, the fixed day settlement system had encouraged liquidity in the market because people could buy and sell without having to pay immediately, thus encouraging speculative activity.

Because of this fixed-day settlement for the cash segment, Mondays and Fridays (due to BSE) and Wednesdays and Tuesdays (due to NSE) had witnessed excessive volatility in the stock prices and the system was fraught with default risks.

As the exchanges wanted successful F&O roll-out without defaults or additional volatility, they preferred Thursdays, which saw relatively low cash volumes in those days, experts said. Though subsequently, Indian bourses introduced rolling settlement, initially T+5 (in December 2001) and to T+3 (2002) and now to T+2 since 2003, exchanges probably did not want to change F&O settlement due to its smooth functioning. The Thursday sentiment continued for weekly contracts too.

Worldover, exchanges follow their own settlement cycles. The expiration dates for the US stock and stock index futures contracts fall on the third Friday of every third month. Some follow the last day of the month for quarterly contracts.

With the BSE now launching Monday weekly settlement, will it induce volatility? Though one has to wait to gauge the success of this move, the chances are low unless more trades shift to the BSE.

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