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Mini derivative contracts ban stumps markets

Nishanth Vasudevan  |  Mumbai 

The move by the Securities and Exchange Board of India (Sebi) to ban mini equity derivative contracts has stumped exchange officials and brokers, who say they have been deprived of a potential winner. By discontinuing the product, the regulator, while denying small traders an opportunity to bet on the key indices, Nifty and Sensex, at a cheaper cost, has also increased the risk of their participation in the regular futures contracts, says analysts.

Mini futures and options contracts, which were introduced in mid-2008, are cheaper than regular futures and options because of lower minimum lot size — the minimum number of units that a trader has to buy. For instance, the lot size for mini Nifty futures is 20, while that for Nifty futures if 50.

The reason cited by Sebi in a circular yesterday to ban the product is that it wants to ensure small or retail traders are not attracted towards the derivatives segment. Activity in mini Nifty futures and options, which never picked up, have been driven by some retail traders or hedgers. The more deep-pocketed prefer regular contracts because of the scope to make bigger gains. But brokers and analysts argue retail traders’ participation in regular Nifty futures is higher than their exposure to mini contracts.

“There has been a very small segment which preferred mini contracts. Also, unscrupulous brokers will now push retail traders harder to trade on regular contracts, which can be riskier,” said the derivatives head of a retail broking firm.

Analysts’ estimates show traders other than institutions and proprietary desks make up for 55-60 per cent of the total equity derivatives turnover, of which Nifty futures and options contribute 80 per cent to the total activity.

Analysts said many traders mostly used mini Nifty futures to hedge their stock positions as the value of hedge using regular Nifty contracts was way too expensive. For instance, if a trader expected Reliance Industries shares to perform better than the Nifty, he could buy Reliance shares and simultaneously sell mini Nifty.

“Mini Nifty futures are cheaper to hedge specific smaller stock positions. Now, traders will be denied of such opportunities,” said Amit Gupta, head-derivatives, ICICIdirect. For instance, the cost of buying a lot of Nifty futures when the Nifty is at 6,000 and the upfront margin is 12 per cent would be Rs 36,000 (6000* 50* 12/100). In the case of mini Nifty futures, the cost would be Rs 14,400 per lot (6000X20X12/100).

Alex Mathews, derivatives head of Geojit BNP Paribas Financial Services, said a lot of retail trading activity could shift to the relatively-safer Nifty options.

In the wake of the mini derivatives ban, exchange officials are concerned whether Sebi would direct bourses to discontinue contracts of other indices such as the CNX Infrastructure, IT and PSE, which have recorded lower volumes than mini futures and options.

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First Published: Thu, November 22 2012. 00:35 IST