It?s been just about two months since they were launched at the end of August this year but trading in derivatives of global indices, on the National Stock Exchange (NSE), is seeing a fair amount of participation. Derivatives traded with the Dow Jones Industrial Index and the S&P 500 as the underlying assets, have on average, clocked volumes of R105 Crore in October, up 5% since their debut. Although this is not bad for a new product, a more buoyant stock market may have seen better volumes. That apart, there is the ?day-night challenge? in the form of the time difference in the trading hours between the USA and India. Moreover, the awareness of the products is relatively low.
According to Suprabhat Lala, VP, NSE, while the exchange is satisfied with the steady increase in turnover of these products, it sees room for improvement through an increase in participation from proprietary traders and portfolio managers. ?We expect more particiation in these products with a further increase in the liquidity as players can hedge a portion of their portfolio,? Lala said.
The NSE introduced futures contract on benchmark US indices the S & P 500 and Dow Jones Industrial and options contracts of S & P 500 in late August, 2011 through a licence agreement with Chicago Mercantile Exchange (CME). The derivatives contracts on these global indices, which can be traded during market hours in India, are rupee denominated thereby reducing the currency risk for investors.
The Dow Jones futures contributed close to 64% of the the average turnover of Rs 105 Crore for October while the average daily turnover of S & P futures stood at R38 Crore. ? Since India has never had a price weighted benchmark index, the higher turnover in the Dow Jones futures surprised us as well since it is a price weighted index,? said Lala.
What could have affected the turnover difference is the smaller contract size of the Dow Jones Futures ( 25 units) compared to that of S & P 500 ( 250) which makes it more of a retail index. This view is substantiated by the the total open interest in all the future series on these indices. While the collective open interest in the S & P 500 future series averaged at about 4 lakh contracts in October, that of Dow Jones industrial remained near 70,000 contracts for the period.
Experts from the portfolio management industry say that they are yet to witness much interest from investors for these products. ? As for the portfolio managers, who typically use derivatives as a hedge against their direct exposure to a particular asset class, ETFs on global derivatives could have been a more preferred product,? said Anil Rego, CEO of Right Horizons. Further, fund managers also need to alter the mandate ( equivalent to the offer document in case of Mutual funds) which allows them to allocate a portion of their funds to a particular product. ?Many fund managers would not have envisaged the inclusion of such products while constructing a scheme. Hence, it requires altering the mandate for actively taking an exposure to these products,? added Rego.