With the markets regulator restricting the stock exchanges’ derivatives expiry days to just Tuesdays or Thursdays, expiry day volatility and speculative trading is expected to reduce though smaller exchanges are not too happy with the decision, explains Ananya Grover
Why is expiry day important for stock exchanges?
The day on which futures & options contracts expire is important for the stock exchanges due to higher trading activity as it results in higher transaction charges for them. The two major players in the Indian derivatives space — the National Stock Exchange (NSE) and the BSE — have been trying to capture these volumes by changing their expiry days in order to increase market share. The rivalry has further increased as the overall volumes have significantly dropped as the regulator introduced restrictions to curb retail investors’ enthusiasm in F&O. NSE was enjoying 100% market share in the segment until May 2023 but BSE’s comeback was a strong one from less than 1% market share in June 2023 to 36.5% at the end of March quarter. This resulted in higher profits and a surge in the share price for BSE. However, a March notification by NSE to change the expiry day to Monday led to a significant fall in BSE’s stock as analysts anticipated a hit on its volumes. This, however, was not implemented as the Securities & Exchange Board of India (SEBI) proposed to restrict expiries.
What has the regulator done?
After floating a consultation paper on the same in late March, following NSE’s announcement to shift the weekly and monthly expiry day for Nifty contracts to Monday — just a day before BSE’s expiry on Tuesday — the regulator mandated that expiries of equity derivatives contracts on all exchanges will happen either on Tuesday or Thursday. It has also directed exchanges to seek its approval before launching or modifying any contract expiry or settlement day.
In the circular, it also mandated that besides benchmark index options contracts, all other equity derivatives contracts will be offered with a minimum tenor of one month, and the expiry will be in the last week of every month on their chosen day.
What is SEBI’s rationale?
In the multi-exchange framework, spacing out of expiry days through the week reduces concentration risk and provides an opportunity for stock exchanges to offer product differentiation to market participants, the regulator has said. “At the same time, too many expiry days have the potential to revive expiry day hyperactivity, which could jeopardise investor protection and market stability, “Sebi noted. While the NSE CEO has been asking for a single day expiry for both the exchanges, BSE has opposed this as NSE will get the market share advantage on the same day. Through this circular, Sebi has promoted healthy competition between the exchanges while also promoting market stability.
Under the extant regulatory provisions, stock exchanges can decide upon the expiry day of their derivatives products, which is a norm in the US also where exchanges even offer 0DTE (zero day to expiry) options, giving traders full flexibility while relying on advanced monitoring.
What industry watchers say
Some experts believe that the new rule will stifle the business of exchanges and curtail innovation. Smaller players who want to launch their derivatives contracts will also find it difficult. Reports also say smaller exchanges MSE and NCDEX are not happy with the regulator’s proposal. The regulator has asked all the exchanges to submit their proposals by June 15.
It is also expected that NSE will likely seek Tuesday as the expiry day for its derivative contract, as this could compress BSE’s trading activity into just two days per week. Currently, NSE’s derivatives contracts expire on Thursdays, and those of BSE expire on Tuesdays. This move could potentially shift market share back towards NSE. In fact, industry players believe that limiting expiry days to Tuesday or Thursday could help streamline market activity and ease the burden on surveillance systems. In addition, retail investors, who have often been very active in the derivatives market, would benefit from simpler trading patterns.
What’s the broader objective?
Despite various measures taken by the regulator to curb retail investors’ enthusiasm in the derivatives space, it is still concerned as the activity on the expiry day remains high despite an additional extreme loss margin of 2%, which is why it has hinted at more actions in the F&O space. In its July 2024 consultation paper, the regulator had noted that for FY 2023-24, 9.2 million unique individuals and proprietorship firms traded in index derivatives segment of NSE and cumulatively incurred a trading loss of Rs 51,689 crore. Of these, just 1.4 million investors made a net profit. That means around 85 out of every100 made a net trading loss. After this, SEBI had come up with a slew of measures in October due to changes observed in the markets with increased retail participation, offering of short tenure index options contracts, and heightened speculative trading volumes in index derivatives on expiry day.