Fears of high derivatives to cash turnover misplaced in Indian market

The Securities and Exchange Board of India (Sebi) last year expressed concern over the high equity derivatives turnover vis-à-vis cash segment in the Indian market. However, a recent report by Asifma, an independent, regional trade association with over 100 member firms, observes that these fears may be misplaced. “Inconsistent reporting methodology by the NSE/BSE versus other exchanges in the region inflates derivatives trading volumes and paints a misleading picture that Indian markets are excessively dominated by derivatives trading,” said Asifma. 

Other markets calculate the premium values on options trades, while the NSE and BSE do it based on notional value. Hence, the value of derivatives' segment appears to be exaggerated, while only the premium value is getting traded. If a consistent method is used, the situation is not worrisome. Data collated by Asifma show that the futures-to-cash ratio in India is 4.2, in line with other regional markets and lower than the figure for Korea (5.1) and Singapore (16.3). After accounting for turnover figures using the option premium method, even if the combined data of futures and options premium is compared to the cash turnover, the ratio comes to 4.31 for India, in line with other markets. The data for India also includes single stock futures, unlike the case with other markets. If the same is excluded, the ratio for India would be even lower.