Cnx Indices A Platform For Derivatives

The joint venture launched by Credit Rating Information Services of India (Crisil) and the National Stock Exchange (NSE) for the development of new index products in the country is expected to give a major boost to index business. This joint venture, which also has a technical tie-up with one of the world's leading rating agencies, Standard & Poor's (S&P), is the first such projects to be launched in India. Worldwide, dealing in the index is a big business and with India on the threshold of derivatives trading, this business is expected to pick up in a substantial manner.

This is first instance where S&P has given its brand name outside the United States, underscoring the faith that the agency has in the local markets.

 

The new indices launched by the venture, each of which will sport the word `CNX' _ with `C' standing for Crisil, `N' for the National Stock Exchange and `X' for the alliance _ can be used for derivatives trading. Fund managers can utilise them to hedge their exposures in the equity markets. Their index funds can replicate CNX indices in order to earn returns.

Open-ended and close-ended funds need benchmarking for evaluation. This, too, can be done using the CNX indices. Though the joint venture has refrained from introducing the new indices for now, it has lent its brand name to three existing indices floated by Crisil and the NSE. The joint venture company, India Index Services & Products (IISL), will offer an array of indices and index services. These include construction, maintenance and dissemination of indices and index data. It will also service portfolio strategy requirements, will track stock weightages, provide valuation parameters and also provide index data and research. In the equity indices segment, the new company will provide index futures and benchmarks. Currently, there will be three indices on which futures will be available. These are the S&P CNX Nifty, S&P CNX Defty and CNX Nifty Junior. Moreover, the new company will also provide benchmark indices which include S&P CNX 500 Equity Index, S&P CNX Industry Indices, CNX Midcap 200 Index, CNX

Segment Indices and CNX Customised Indices.

The CNX indices are computed using market capitalisation weighted methods wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index, and importantly, corporate actions such as stock-splits and rights without affecting the index value. Index maintenance will be another responsibility of the new company. This plays a crucial role in ensuring stability as well as in meeting the objective of being a consistent benchmark of the equity markets. For this purpose, ISIL has constituted a policy committee which evolves guidelines for managing the CNX indices. The market capitalisation of all companies that are included in S&P CNX should be Rs 500 crore or more, and all selected securities must bear a weight in the index in the proportion of their market capitalisation. The impact-cost criteria for inclusion in S&P CNX Nifty should be less than 1.5 per cent and the security

should have been dealt for 85 per cent of the trading days. This index represents about 45 per cent of the total market capitalisation and its impact cost for a portfolio of Rs 50 lakh is 0.25 per cent. Impact cost is defined as the cost of executing a transaction in a security in proportion to the weightage of its market capitalisation as against the index capitalisation at a weightage of time.