Derivatives volumes may recover after settlement rule changes: Analysts

Sebi will restore the volume-weighted average price method for expiry-day derivatives settlement from December 7, following trader concerns over sharp price swings

The Indian markets regulator's decision to revert to the volume-weighted average price method to determine ​settlement prices of derivatives contracts on expiry days could ​reduce volatility and help revive volumes, according to analysts.

The Securities ‌and Exchange Board of India said that from December 7, derivatives contracts on expiry days will once again be settled using the volume-weighted average price of the last 30 minutes of regular trading.

The move follows backlash from traders amid sharp swings in stock and index levels after the closing auction session (CAS) was implemented on August 3, which prompted some to scale back on trading activity.

 

Total derivatives turnover on the National Stock Exchange of India fell 19.2 per cent ‌month-on-month to ₹34.48 trillion ($363.37 billion) in August, following the introduction of CAS. This added to a decline in volumes due to tighter regulations on lending to proprietary traders and higher transaction taxes.

"This (changes to CAS) should reduce expiry-day volatility under the closing auction session, benefiting brokers whose orders remain below pre-CAS levels," brokerage firm Jefferies said.

Analysts ​now expect volumes to return to pre-CAS levels, although the extent of the recovery remains ‌uncertain.

"The options traders who had moved away from the system may start coming back," said Raj Deepak Singh, vice president ​of ‌derivatives and quantitative research at ICICI Direct.

Under the revised rules, trading in index ‌derivatives will continue until 3:45 p.m. IST, except on expiry days when trading will end at 3.30 p.m. IST, SEBI said.

Shares of ‌exchange ​operators BSE and ​National Stock Exchange of India fell 1.7 per cent and 0.6 per cent, respectively, on Friday, while those of brokerage firms were mixed. Angel One ‌fell 2.7 per cent ​and Groww rose 1.2 per cent.