After sliding from its 9th position of the most traded derivative in 2010 to 12th in 2011, for the first three months of 2012, the ranking of the Nifty index futures has further dropped to 13th, the data shows. The decline in ranking followed a more than 27% decline in the traded contracts. This was the second highest decline amongst the featured top derivatives, the first being a 31.5% decline in the options contracts traded on Kospi 200 on Korea Exchange. In the same quarter last year, the Nifty futures were the eighth most traded derivatives in the world.
This drop is a reflection of reducing investor participation in the Nifty futures also as the open interest in the instrument fell to a multi-year low in the recent past. According to the data available with FE, in early June, the open interest in the Nifty futures fell to 1.61crore shares, their lowest in more than five years.
Since the start of April, amid uncertainty over the likely impact of General Anti-Avoidance Rules (GAAR) on the participation of foreign institutional investors (FIIs) in Indian market, especially in the derivative segment, it was speculated that FIIs may choose Singapore as the preferred destination to execute their India-centric trade.
Accordingly, it was also contemplated whether the falling open interest in the Nifty futures on National Stock Exchange (NSE) indicates FIIs are relocating their derivatives exposure towards the Nifty futures traded on Singapore Exchange (SGX Nifty).
While traders confirmed that since May a portion of the open interest from CNX Nifty on NSE has shifted to SGX Nifty on SGX, they noted it to be not significantly big.
On an average the open interest in SGX Nifty has grown by about 20% in the period, said a derivatives trader. According to him, certain FII investors, including some long-only funds who have Indian exposure in their portfolio, may have increased their participation in the SGX platform.
Notably, in May, the average open interest of both the SGX Nifty futures stood at 5.8 lakh shares, against 4.8 lakh shares in April. However, another derivatives trader pointed out that decline in the futures participation has been an underlying trend since 2010 as a result of a change in the computation of Securities Transaction Tax (STT) declared in the Budget of 2008-09.
While the STT was earlier calculated on the notional value of a traded options contract, since FY10 the same is calculated on the premium of an option traded, which is a much smaller amount than the notional value. Consequently, the statutory cost of a transaction of an option instrument turns out to be ten times lesser than that of a future instrument.
Since more than half of the total derivatives trade is carried out by the proprietary desks of various brokers, there has been a gradual shift towards using options in the trading strategy to save on the total amount payable as STT on derivatives transaction, he added.