Derivatives trading on NSE volatility index gets nod

The Securities and Exchange Board of India (Sebi) may grant the National Stock Exchange (NSE) its long-pending demand of being allowed derivatives-based trading on the volatility index (VIX).

VIX, a measure of market volatility through 30 days, helps gauge investor sentiment.

Two sources privy to the development said soon, Sebi would allow NSE to launch trading in futures contract, based on its ‘India VIX’ index. An NSE spokesperson declined to comment. An email sent to Sebi was not immediately answered.

Sources have said futures contract on India VIX will have three weekly contracts and a new contract will be available for trading every week. The minimum trading lot size for the futures contract is likely to be Rs 10 lakh and contracts will be cash-settled, in line with other derivatives contracts.

The NSE had first applied to start trading VIX-based derivatives in 2010. However, Sebi was said to have been uncomfortable with the product, owing to its perceived speculative nature. Though trading on VIX derivatives isn’t allowed as of now, the NSE has been providing live values of the India VIX index since July 2010, after launching it in 2008.

The value of the index is calculated on the basis of Nifty options and provides an indication the volatility in the next 30 days; the higher the value, the greater the expected volatility.

Derivative analysts said the product would help investors hedge their portfolios against market volatility. Sebi’s approval in this regard indicates the regulator may be softening its stance on allowing trading in complex derivatives products in the Indian market. Recently, the regulator had allowed exchanges to launch interest rates futures on a cash-settled basis.

Globally, trading on VIX is popular. The Chicago Board of Options Exchange had introduced a volatility index for the American markets in 1993.

Sebi's approval to allow VIX signals that the regulator's could be softening its stance in allow trading in complex derivatives products in the Indian market.

Recently, the regulator allowed exchanges to launch interest rates futures (IRF) on a cash-settled basis.