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It is over a decade since exchange-traded derivative instruments were launched in India and the popularity of these instruments has grown at a relentless pace in this period. A recent survey of the global derivative market, published by World Federation of Exchanges, shows that Indian exchanges have now evolved as significant players in the global derivatives arena. Our exchanges such as the NSE, MCX and MCX-SX top the volume charts in many of the derivative product categories.
The global picture
Global trading volumes in derivative instruments expanded 25 per cent in 2010. The highest growth was clocked by the Asia-Pacific region that grew 41 per cent. In product categories, equity derivatives have the largest share of 61 per cent if the number of contracts traded is considered. Interest rate futures (14 per cent), currency (11 per cent) and commodity derivatives (14 per cent) account for rest of the pie.
Currency derivatives
Currency derivatives that make up the smallest segment of the global derivatives market grew at a stellar 142 per cent in 2010 mainly, thanks to Indian market that accounts for 71 per cent of the turnover. MCX-SX registered 294 per cent year-on-year growth in the number of contracts traded, while NSE grew 221 per cent.
Currency futures accounted for most of the currency derivatives volume in India since currency options were introduced only last October.
While trading is allowed in four currency pairs of dollar-rupee, euro-rupee, pound-rupee and yen-rupee pairs, it is the dollar-rupee pair that is most widely traded and accounted for almost 90 per cent of the turnover last year. That the traders were able to understand the dynamics of the rupee movement against the dollar relatively better could be the reason behind this preference.
The top exchange, globally, in terms of the number of contracts traded in currency futures in 2010 was MCX-SX with 885 million contracts. NSE was second with 726 million contracts.
In terms of the notional value of the contract traded, however, Indian exchanges are not the leaders. That spot is occupied by Chicago Mercantile Exchange group that traded contracts worth $29,979 billion as against $908 billion traded on MCX-SX.
Stock futures
Indian exchanges also dominated in single stock futures. While in terms of number of contracts traded, NYSE Liffe is the largest exchange with 289 million contracts, NSE tops the list when the notional value of contracts traded is considered. According to WFE report, contracts worth $1210 billion were traded on the National Stock Exchange last year.
Interestingly, the share of single stock futures in the NSE derivatives segment is steadily declining. These instruments were very popular in late 2007 when stock prices were zooming. They accounted for 66 per cent of the total value of derivative contracts traded in December 2007. This share has dwindled to 18 per cent in December 2010, reflecting the shift in preference of Indian derivative traders.
These traders are now veering towards index options that accounted for 64 per cent of the value of traded contracts toward the end of 2010. Higher outlay, lower liquidity and greater risk in single stock futures could be the reasons behind this shift.
Index options
Another product segment where Indian exchanges feature prominently is the index option segment. The NSE is the second largest in this segment in terms of the number of contracts traded. In notional value of trades, it ranks sixth.
Interestingly, the BSE registered the highest growth in this segment in 2010; growing at 918 per cent. Volume on the NSE grew at a healthy 65 per cent on a larger base. The report also gives the total option premium collected for the calendar. NSE collected option premiums worth $33 billion, up from $25 billion in 2009. Interestingly, premiums collected were only one per cent of the notional value of the contracts traded on NSE. This corroborates our view that actual money deployed by traders in this segment is miniscule.
The Nifty is also the second largest traded index option globally with 530 million contracts. It is, however, far below the leader, the Kospi 200, contract that traded 3526 million contracts last calendar.
Commodity derivatives
A peek at the commodity derivatives segment also throws up some interesting facts. Commodity derivatives grew 35 per cent in 2010. Chicago Mercantile Exchange (CME) group dominates this group with its various trading platforms such as CME, CBOT and NYMEX.
The Multi-commodity Exchange of India (MCX) ranks sixth in contract volumes with 197 million contracts traded in 2010. CME group tops the list with 843 million traded contracts. In the global commodity derivatives market, agri-commodities accounted for 46 per cent of the volumes with metals and energy accounting for 27 per cent each.
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