BSE strengthens its presence in derivatives :: Business Line,

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In September last year, BSE Ltd (formerly Bombay Stock Exchange) launched a series of Liquidity Enhancement Incentive Programmes (LEIPS) with the intention to create liquidity in the bourse's Futures and Options segment. The first programme LEIPS-I (BETA) was launched on September 28, 2011, followed by LEIPS-II on October 26, 2011.

This all-inclusive programme incentivises the participants for putting through transactions under the programme

POSITIVE RESPONSE

The participation has been broad-based and liquidity in derivative segment has increased since the launch.

According to market watchers, the programme has received a positive response and has been making steady progress.

The highest daily turnover recorded so far is Rs 4,500 crore in its Futures and Options segment.

The number of brokers registered for this programme are 400 with one-fourth trading on a daily basis.

Typically turnover in derivative segment is higher than cash segment due to the higher leverage that traders in futures and options enjoy.

For the first time since the introduction of derivatives in June 2000, Futures and Options segment turnover on BSE matched its cash market segment turnover.

CHANGES & FEEDBACK

The Exchange has been regularly amending the terms and conditions of the programme based on market feedback and policy changes.

One such policy shift is the change in expiry cycle for its monthly derivatives contracts from mid-month to end-of-month expiry with effect from February 2012 contracts and onwards. This will align the derivative segment on BSE with that on the NSE.

TWO LEVELS

Against this background, the Exchange has felt the need to run a separate liquidity enhancement programme (LEIPS III) for its Options sub-segment to infuse greater impetus and focused participation in developing the Options market at the BSE.

LEIPS III focuses on Options contracts on Sensex with a view to build a healthy options book in Sensex. The programme defines two levels of market making.

Level-1 ‘Quote Obligations' is similar to the market maker obligations in prevailing LEIPS programme.

In addition, the market maker can also maintain Level-2 ‘Quote Obligations' wherein the market maker will be required to do market making for 95 per cent of the trading time with tighter spreads. The intention is to create a very deep and tight order book in the Sensex Options contracts.

The market makers fulfilling the Level-2 Quote Obligations will be entitled to receive up to Rs 2 lakh a day.

INCENTIVE PAYMENTS

Other significant amendment includes changing the methodology of incentive payments from ‘first-come-first-served' basis to ‘pro-rata' basis. This step aims at encouraging the members to trade at all times without missing out on incentives, since all trades will be guaranteed some payout.

In addition, in order to attract further trading volumes after the incentive cap is breached on a given day, the Exchange will be providing incentives to market maker on their passive volume in such non-incentive period.

The market makers will continue to get a trading incentive of Rs 4,600 a crore of round trip and General Market Participants Rs 2,200 a crore of round trip.

The payout structure in case of Options been recently revised with payouts being offered on notional volume and payout rates ranging from Rs 200-400 a crore on notional volume traded.

For Open Interest (OI) based incentive, separate payout structure has been worked out. The OI incentive will be paid on daily basis for Rs 1,000 crore of daily Futures OI and Rs 4,000 crore of daily Options OI, paid at Rs 250 a crore of daily OI of the member. This is expected to increase the appeal of OI incentives.

All the newly introduced end-of-the-month contracts as well as existing mid-month contracts have been added in LEIPS Programme.

(The author is Chief Business Officer, BSE Ltd. The views are personal)