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Sebi asks BSE to rethink closure of derivatives

Rakesh P Sharma & Janaki Krishnan in Mumbai

The Securities and Exchange of Board of India has told the Bombay Stock Exchange to review the bourse's plan to shut down its derivatives segment.

The markets watchdog is of the view that if the exchange closes down its derivatives segment, it would lead to a monopoly situation with the National Stock Exchange being the sole player in the sector.

"This would defeat Sebi's entire objective of allowing the exchanges to undertake such trades," said a source familiar with the development.

However, Sebi cannot really enforce any decision on the BSE since it is the prerogative of a stock exchange to decide on which business activities it wants to continue with or not.

The BSE governing members, in mid-August, had looked upon an option to shut down the derivatives segment owing to low trading volumes.

Sources close to Sebi said that they merely wanted the exchange to do a re-think on the matter. In fact, according to information, the Sebi has also offered to assist the exchange in ironing out its problems with reference to the derivatives segment.

The BSE has already approached Sebi with a proposal to support the exchange to compete with NSE. According to the proposal, each member limit in derivatives should be reduced to Rs 5 crore (Rs 50 million) per broker per scrip from the current level of Rs 50 crore (Rs 500 million) or 7.5 per cent of open interest (whichever is higher) on each exchange, in a particular underlying.

Further, it has also suggested that certain scrips should be exclusively traded on the BSE. Lower limits per member is expected to shift some of NSE's business to the BSE. In the last two years, BSE has invested over Rs 10 crore (Rs 100 million) in building its derivative segment but has not been able to attract market participants who prefer trading on the NSE due to greater liquidity and lower impact costs.

BSE has recurring expenses of around Rs 2-3 crore (Rs 20-30 million) annually. With no business, the exchange is finding it difficult to sustain itself and hence is looking at the option of shutting down its derivative segment and leverage its advantages on the cash segment.

At a recent meeting of the governing board of the bourse, the merits of running the derivatives segment on the exchange in face of mounting expenses were discussed.

BSE is inclined to put part of the blame on Sebi, which did not permit it to expand its operations in other cities for almost four years, while the NSE was permitted to do so.

Interestingly, more than 60 per cent of NSE's derivative business comes from outside Mumbai. The J R Verma committee, which was set up to look into derivatives trade in India, in its report had pointed out the role of regulators in dealing with monopolies.

The report stated: "There are broadly two approaches to deal with the emerging monopolistic trends. The first and more obvious approach is to attempt to regulate the emerging monopolies. The second and far more effective approach is to pursue regulatory policies that would increase competition significantly."

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