NSE changes expiry day for equity derivatives contracts

Synopsis

The exchange has changed the expiry day of all index and stock derivatives contracts from April 4. The monthly contracts of stock derivatives, Nifty, Bank Nifty, Fin Nifty, Midcap Nifty, and Nifty Next 50 contracts will expire on the last Monday of every month, while the weekly contracts of Nifty 50 would lapse on Monday every week.

Mumbai: NSE unexpectedly changed the expiry day of its equity derivatives contracts to Monday from the long-established Thursday. A look at what could have prompted the country's largest exchange to alter them.

Which are the contracts NSE has changed the expiry day?

The exchange has changed the expiry day of all index and stock derivatives contracts from April 4. The monthly contracts of stock derivatives, Nifty, Bank Nifty, Fin Nifty, Midcap Nifty, and Nifty Next 50 contracts will expire on the last Monday of every month, while the weekly contracts of Nifty 50 would lapse on Monday every week.

Why did the exchange change the expiry day?
A senior NSE official said it was based on feedback from traders and investors across the region, including foreign investors. "We're also aware that some new exchanges are planning to enter the equity derivatives space, and we wanted to establish a unique expiry day for ourselves ahead of any potential competition - a strategic decision we felt was necessary," said Sriram Krishnan, chief business development officer at NSE.

Is there more to it?

Some brokers think it could partly be to thwart competition from BSE which changed the expiry day of its derivatives contracts from Friday to Tuesday from January 1.

Since the change was announced by BSE, the average daily premium turnover, or the total premium paid by traders for derivatives transactions, went up to about ₹11,500 crore in January and February, compared to a range of ₹5,000-₹9,500 crore in April to December last year.

In the earlier expiry system (NSE on Thursday and BSE on Tuesday), traders used to spread their positions on both days across exchanges to get the time-value benefit. Traders used the extra day to bet on options on both exchanges separately because of the gap in time. Now, with expiry on consecutive days, this time-value benefit is no longer available. Time value is a key aspect of options premium pricing. With NSE options contracts being more liquid, brokers said traders could prefer them over BSE contracts.

So is it disadvantageous for BSE?
Brokers and analysts said that this move could lead to a reduction in BSE's derivatives turnover from April. BSE shares closed 3.7% lower at ₹4,290, after making an intraday low of ₹4,035 in reaction to the announcement. The stock has fallen 20.7% in the last five trading sessions, also because of concerns over a recent proposal by Sebi to tighten the way outstanding positions in stock futures and options are calculated in an attempt to reduce the possibility of manipulation in derivatives trading. Goldman Sachs said Sebi's move doesn't bode well for BSE, where options trading accounts for around half of the top-line, and nearly 70% of BSE's derivatives ADT (average daily turnover) comes from proprietary traders, whose activity could be curtailed by these proposed changes and monitoring of position limits.

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