NSE's next growth leg: New products, newer markets, more technology

NSE is conservative in accounting for capital expenditure because much of its investment is in manpower and software, which is expensed rather than capitalised, says Ashishkumar Chauhan

The National Stock Exchange (NSE) sees its next phase of growth coming from a combination of new products, expansion into newer markets and investments in technology and infrastructure, said exchange’s MD & CEO Ashishkumar Chauhan in an interaction with Khushboo Tiwari & Kairavi Lukka. Edited excerpts:

  

Q: What are the next growth avenues for NSE?

 

A: If markets perform well, there could be a significant jump in volumes. The markets have been sideways for the last three years, so that is one factor. The second is the number of instruments that we are allowed to offer. Electricity is one area, the bond index is being discussed, and electronic gold receipts (EGRs) have already started. Several new products are being allowed by Sebi. As an exchange, we cannot independently decide to launch a new product. We have to approach Sebi, which consults stakeholders before framing regulations and allowing the product. New products will come when there is a need for them to be traded on a well-functioning market. NSE has experience across different types of markets, from IPOs and mutual funds to high-frequency markets such as equities and equity derivatives. We understand how to structure markets, build liquidity and make them efficient, fair, transparent and orderly.

  

Q: What is the growth opportunity for NSE in derivatives, particularly as the regulator reviews the segment?

 

Derivatives are an important part of the market ecosystem, and NSE has experience in structuring and operating high-frequency markets such as equity and equity derivatives. The focus is on ensuring that these markets have adequate liquidity and are efficient, fair, transparent and orderly. At the same time, the development of the derivatives market will depend on the regulatory framework and the products that Sebi allows exchanges to offer. NSE cannot independently introduce products; these have to go through the regulatory process. More broadly, the opportunity is to expand the range of markets that can be automated and brought onto efficient market infrastructure. Derivatives, along with equities, bonds, EGR, energy and commodities, form part of this wider market ecosystem.

  

Q: How will Sebi’s decision to allow FPI participation in non-agricultural commodity derivatives help NSE?

 

A: It remains to be seen whether it translates into significant market share, but there are advantages. NSE has worked with its clearing house for the last 30-35 years, which may not be the case with other exchanges. FPIs that are investing rather than trading would look at the creditworthiness and safety of the clearing house. NSE’s clearing infrastructure also allows scale and utilisation of margins across different product classes and types. So, there are benefits, although it does not necessarily mean a significant increase in market share. In trading system comparability also, FPIs are used to trading on NSE trading system for very long. They will find no issue in trading on NSE commodities also. 

 

Q: What is the status of the proposed bond index?

 

A:NSE has applied for both the government securities and corporate bond indices. The product contours and specifications will have to be decided by Sebi and the Reserve Bank of India (RBI), given that the product involves both regulators. Market making in bonds is another area that needs to be worked upon. There are committees looking at these issues, and Sebi would consult the RBI in this regard

 

Q: RBI measures have affected proprietary trading volumes. How do you view this? 

 

A: When regulators identify issues with a particular activity, they will take steps they consider appropriate. The objective is not necessarily to hurt an entity or reduce its volumes; it could be to protect the integrity of the banking system. The important part is to create a framework that continues to allow businesses to operate within those requirements.

 

Q: What are NSE’s plans for capacity and technology investment?

 

A: NSE is conservative in accounting for capital expenditure because much of its investment is in manpower and software, which is expensed rather than capitalised. As a market infrastructure institution and a first-level regulator, it also needs to be cautious about showing higher profits. On co-location, demand remains strong. NSE currently has around 2,200 racks, with 40-50 new requirements coming every month. Once the existing capacity starts getting exhausted, a new data centre would take around three years to build. NSE has acquired land and the basic work has started.

 

Q: How is NSE strengthening its surveillance framework, including through artificial intelligence?

 

A:AI is another tool that NSE is experimenting with. New tools are tested and their effectiveness evaluated, with systems evolving over time. Surveillance remains a key responsibility. Nearly half, of NSE’s employees are in regulatory functions, and the exchange takes its role as a regulator seriously.

 

Q: What is the broader opportunity for NSE?

 

A:The objective is to build markets that are fair, efficient, transparent, orderly and low-cost. NSE hascovered the core part of the market, including equities, bonds, REITS and INVITs and derivatives, but automation can help expand into markets that are not currently well developed. For instance, electricity futures can improve price transparency and efficiency. Similarly, converting physical gold into EGRs could make gold-backed lending easier by allowing lenders to know the quantity of gold held and reducing the need for large haircuts. The broader objective is to reduce costs, improve transparency and make markets easier to access. Each market has its own challenges, and NSE’s approach has been to identify and solve those problems one by one.