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		70		8		852.5	17	418.1
May-11	28534		118415	24.1	137203	20.8		69		13		536.7	0.1	101200.0
Jun-11	29223		110826	26.4	135471	21.6		67		3		2082.4	0.5	13788.6
Jul-11	28528		122141	23.4	130154	21.9		67		2		3888.5	0.8	8095.5
Aug-11	29264		141131	20.7	130724	22.4		70		2		3285.8	0.2	33734.9
Sep-11	28767		135013	21.3	133122	21.6		98		40		245.1	2	4706.2
Oct-11	28152		117538	24.0	120804	23.3		131		258		50.7	38	343.1
Nov-11	27201		135828	20.0	127254	21.4		195		1152		16.9	490	39.8
Dec-11	25234		131851	19.1	126753	19.9		196		2220		8.8	876	22.4
Jan-12	25373		102340	24.8	115963	21.9		213		3143		6.8	1396	15.3
Feb-12	26859		132089	20.3	132355	20.3		231		21721		1.1	1231	18.8
Mar-12	25377		135420	18.7	135817	18.7		297		10396		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