NSE plans new volatility index with revised methodology; pilot launch soon

The National Stock Exchange (NSE) is exploring a new volatility index with new methodologies under consideration. The index would be different from India Vix, the market’s benchmark gauge of near-term risk and fluctuations, according to people familiar with the matter.

 

NSE has initiated preliminary discussions on a pilot, with multiple methodologies under consideration, the people said. They said testing is expected to begin shortly, followed by consultations with market participants, academics and other industry stakeholders.

 

“The pilot may involve testing how the index behaves on different volatile days and whether it correctly reflects market movements. The testing could take several months, followed by discussions,” said a person familiar with the developments.

 

Sources said one reason for exploring such an index could be to launch derivatives contracts linked to it.

 

NSE had launched India Vix futures in 2014 but discontinued them in 2017 because of low liquidity and participation.

 

However, for the new index, the exchange may have to seek fresh approval from the market regulator, Securities and Exchange Board of India (Sebi), for any derivatives contracts.

 

Responding to emailed queries, NSE said: “The company has filed a DRHP (draft red herring prospectus) with Sebi. We are unable to provide further comments at this stage.”

 

India Vix serves as a barometer of near-term market volatility and risk, measuring the rate and magnitude of price movements. It is based on Nifty index option prices, with the volatility figure calculated from the best bid-ask prices of Nifty options contracts.

 

'Vix' is a trademark of the Chicago Board Options Exchange (CBOE) and Standard & Poor’s, which have licensed its use to NSE for India Vix.

 

“All the data and research for India Vix is provided by NSE. So, it may make sense to explore a volatility index of its own,” an industry expert said.

 

The exchange currently offers derivative contracts on indices such as Nifty 50, Nifty Bank, Nifty Financial Services, Nifty Next 50 and Nifty Midcap Select. Of these, only Nifty 50 has derivatives contracts expiring weekly, following Sebi’s mandate.

 

NSE is expanding its derivatives offerings with the launch of contracts on the Nifty India FPI 150 index from August 12.

 

Globally, there are a few exchange-traded funds based on Vix futures contracts.