Building Integrity & Transparency in Stock Market

NSE is celebrating its Silver Jubilee year of 25 years of Nifty Index and 20 years of Index Derivatives. Addressing the event Chairman of  SEBI Shri Ajay Tyagi said that Nifty 50 Index was launched in April 1996 and is based on free float market capitalization and comprises 50 large and liquid stocks traded on NSE. It currently represents 13 sectors of the economy. The constituents of Nifty 50 index capture 63.4% of free float market capitalization and 32.5% of turnover of the entire equity market based on average data for June to November 2021. Over the period, it has become one of the most widely used benchmarks in the Indian equity market.

As of November 30, 2021, there are 16 Exchange Traded Funds (ETFs) benchmarked to Nifty 50 index with total assets under management (AUM) of more than Rs. 1.6 lakh Crore. There are 18 Index funds on the Nifty 50 index in the Indian domestic market. The total AUM of these funds is around Rs. 16,000 Crores. Also, there are 7 international ETFs based on Nifty 50 with the total AUM of more than USD 1 billion.

Equity derivatives trading in India commenced with the launch of index futures in the year 2000. SEBI had consciously taken the decision to allow introduction of derivatives in India in a phased manner – other products such as index options and single stock futures and options were introduced gradually later on giving ample time to markets to get familiar with them. The calibrated approach adopted keeping investor interests at the centre has helped in developing the markets in an orderly fashion.

Unlike most international markets, SEBI ensured that all derivatives trading takes place on recognised exchanges. SEBI came out with detailed guidelines for index and stock selection for derivative contracts. A comprehensive risk management framework to manage the risks associated with derivatives was also prescribed. Given that derivatives are risky products, real time client level gross margining was introduced by SEBI.

Significant thought went into deciding contract sizes, client on boarding requirements, risk disclosure requirements etc. SEBI has been constantly monitoring these parameters and making appropriate changes to ensure that Indian derivatives market meets the requirements of varied investors.

The combination of good product design and prudent policy framework have resulted in success of equity derivatives markets in India. On NSE, equity derivatives are available on 3 indices and 197 stocks. Average monthly equity derivatives market turnover stands at around Rs. 1221 lakh crore till December of this financial year. The same was at Rs. 536 lakh crores in FY 2020-21 and Rs. 287 lakh crores in FY 2019-20. NSE has been the largest derivative exchange globally for two consecutive years in a row – in 2019 and 2020.

 In a globalized world, pools of capital desirous of taking exposure in a jurisdiction may do so either directly or by way of exposure to derivatives on the underlying of that jurisdiction being traded in other jurisdictions. Derivatives on Nifty traded on SGX at Singapore provides such an avenue to foreign pools of capital to take exposure to Indian market.

It is, however, observed that such facility may lead to shift of liquidity from one jurisdiction to the other jurisdiction. For instance, around 60% of turnover and around 75% of open interest in Nifty Index Futures is at SGX. With the view to coalescing liquidity at one place, measures have been taken by Government and Regulator to incentivize trading of derivatives on Nifty at GIFT IFSC shortly.

 In line with the global trend, India has seen a significant increase in the number of individual investors accessing the capital markets. From an average of 4 lakh new demat accounts opened every month in 2019-20, it tripled to 12 lakh per month in 2020-21 and has further increased to around 29 lakh per month till November of the current financial year i.e. more than seven times of the monthly average of the pre-Covid year of 2019-20.

In fact, the cumulative demat accounts, which stood at around 3.6 crore as on March 2019, were 7.7 crore as of end of November 2021 – what was achieved in over two decades has been achieved in the last about two and a half years.

Derivatives are leveraged products and have potential to cause severe loss depending on how they are used. Considering this, since their launch,  SEBI had taken a policy view to limit leverage by requiring clients to pay upfront margin for taking positions in derivatives. To improve risk management efficiency, a comprehensive review of the margin framework was carried out in February 2020.

Brokers are required to collect margins from clients upfront, that is, prior to providing them exposure. To ensure this, there are norms for reporting of margin collection from clients by brokers and penalties for short-collection / non-collection of margins. SEBI has now issued framework to also enable verification of such upfront collection of margins from clients in cash and derivatives segment.

SEBI’s focus while prescribing a threshold level of margin for derivative trades has been to control leverage and thus ensure market safety. Considering that margins lead to blockage of costly capital and that efficiency in margining is equally critical, SEBI issued guidelines on operationalising interoperability amongst different Clearing Corporations for equity, equity derivatives and currency derivatives segments. Such an arrangement leads to reduced exposures on account of netting of obligations for trades executed across different exchanges and therefore reduced margin requirements.

Measures have been taken to strengthen the mechanism for protection of client collateral viz., pledge/ repledge of client securities collateral and segregation of collateral at client level. It has been decided to move equity cash markets from a T+2 settlement cycle to T+1 settlement cycle in a phased manner beginning February 2022 , which would reduce unsettled exposures and the quantum of margins blocked at any point in time. The functioning of MIIs is highly technology intensive. Any technological disruption at MIIs, therefore, adversely impacts all classes of investors/market participants as well as the credibility of the securities market. SEBI in July 2021, prescribed a framework for financial disincentives for technical glitches at MIIs. This framework would be automatically triggered under predetermined conditions.

Increased investors’ participation is an extremely encouraging sign for the growth of capital market in India. It is for the regulator, market infrastructure institutions, market intermediaries and other stakeholders to ensure they keep their trust and faith in the market. The investors, on their part, need to take informed investment decisions based on their risk appetite. Especially in case of derivatives, it is very critical to apprise the investors how these products can be used to hedge their risks and the risks involved in taking speculative positions so that they do not get their fingers burnt and disappointed from the capital market.

(Excerpts from SEBI Chairman’s Speech)  

Bureau Galactik Views

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