June 28, 2012

settlement guarantee fund of f&o segment of nse & bse

Below is an analytical report I contributed earlier this month for the newspaper I work for. It analyses the trend in the level of settlement guarantee fund of the equity derivatives segment of the two main stock exchanges in India. 

Here goes:

Low levels of BSE's SGF haunts F&O investors
The settlement guarantee fund levels of the two stocks reveal a mixed picture of the safety net on offer

The recent surge in trading turnover of futures and options (F&O) trades on the BSE has come on the back of low levels of safety net provided by the settlement guarantee fund (SGF), a FCRB analysis reveals. The SGF used by the National Stock Exchange of India (NSE) for settling its F&O trades is seen to be maintaining its high quantum levels although the last financial year has seen some erratic movement in its quantum.

Ever since the late 1990s when NSE's clearing corporation, National Securities Clearing Corporation, started offering investors the financial guarantee of the settlements on the NSE, there has been an underlying assumption in all investors' minds that all trades in the stock market system which are settled are fully safe. When you buy or sell and the counter-party to your trade (determined through an inbuilt alogirithm by the clearing corporation) defaults resulting in a default by that counter-party's broker, you will be protected because the clearing corporation will first settle the trade and afterwards take action against the defaulter broker.

Since it is the settlement guarantee fund (SGF) maintained by clearing corporations which is used to settle a trade, concerned investors continuously monitor the level of SGF on the stock exchanges.

In the past few months, the BSE has given the NSE a run for its money as far as the trading turnover on its F&O segment is concerned. In the four months from February to May this year, the average daily turnover on BSE's F&O segment was Rs 19,745 crore, 11.6 times more than what it was in the previous four months (October 2011 to January 2012). Meanwhile, NSE's F&O segment clocked average daily turnover of Rs 1,25,374 crore in the last four months, three per cent more than that in the previous four months. Therefore, from being 72 times that of BSE in October-January, NSE's turnover is now just 6.3 times (February-May).

But the SGF of BSE has not risen to match the rise in turnover. Securities and Exchange Board of India data, available till March this year, reveals BSE's SGF for its F&O segment rose to just Rs 297 crore at the end of March from Rs 71 crore at the end of March last year. As a proportion of average daily turnover, BSE's SGF was a fraction to what the corresponding proportion of NSE in financial year 2011-12 (see table).

In the last quarter of FY12, when F&O trading volume was shooting up rapidly on the BSE, its average of the SGF at the end of three months in that quarter was Rs 247 crore which made up for just 2.1 per cent of the average daily turnover in that quarter. This level was one-tenth of that seen on the NSE in that quarter. NSE's average month-end SGF was Rs 25,870 crore, or 21 per cent of the average daily turnover of Rs 1,23,283 crore.

But since BSE's F&O was seeing a very low level of daily open interest position due to large-scale intra-day squaring off, its average SGF as a proportion of the average daily open interest value in the last quarter of FY12 was at a decent level of 20.7 per cen

Level of guarantee comfort

This is how the two exchanges fared in FY12 in terms of SGF, turnover & OI in their equity derivatives segment

NSE Equity F&O

BSE Equity F&O

Month-end SGF
Avg dly turnover SGF to turnover (%) Avg dly OI SGF to OI (%)
Month-end SGF
Avg dly turnover
SGF to turnover (%) Avg dly OI SGF to OI (%)
Apr-11 29601
130628 22.7 137558 21.5
852.5 17 418.1
May-11 28534
118415 24.1 137203 20.8
536.7 0.1 101200.0
Jun-11 29223
110826 26.4 135471 21.6
2082.4 0.5 13788.6
Jul-11 28528
122141 23.4 130154 21.9
3888.5 0.8 8095.5
Aug-11 29264
141131 20.7 130724 22.4
3285.8 0.2 33734.9
Sep-11 28767
135013 21.3 133122 21.6
245.1 2 4706.2
Oct-11 28152
117538 24.0 120804 23.3
50.7 38 343.1
Nov-11 27201
135828 20.0 127254 21.4
16.9 490 39.8
Dec-11 25234
131851 19.1 126753 19.9
8.8 876 22.4
Jan-12 25373
102340 24.8 115963 21.9
6.8 1396 15.3
Feb-12 26859
132089 20.3 132355 20.3
1.1 1231 18.8
Mar-12 25377
135420 18.7 135817 18.7
2.9 955 31.1

Figures in Rs crore unless specified otherwise

SGF: Settlement Guarantee Fund      OI: Open Interest

Source: Sebi, BSE, NSE, Bloomberg. Analysed by FC Research Bureau

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