Story: Equity F&O turnover surge Jan-Mar to aid listed BSE's topline

Equity F&O turnover Jan-Mar surge to boost BSE's topline

Informist, Apr 6, 2024

By Rajesh Gajra

MUMBAI - The sustained trend of rising turnover in equity derivatives and cash segments of BSE and National Stock Exchange in the quarter ended March is likely to reflect favourably in their topline performance during the quarter. The BSE Ltd is a listed company and its share price has apparently moved up sharply in the last few weeks in anticipation of improved revenue performance on the back of higher transaction charges income. The NSE is not listed.

The whole of the last financial year 2023-24 (Apr-Mar) has seen a doubling of notional turnover in equity derivatives segment of NSE, which is the larger of the two bourses in terms of turnover size. The BSE, on the other hand, has seen its market share in equity derivatives jump to 9.1% in 2023-24 from 0.9% in the previous year, led by relaunch of Sensex derivatives contracts in modified form in May last year followed by change in expiry date. In 2022-23, BSE's equity derivatives turnover was very low.

On the equity cash market front too, the turnover has been on a sharp uptrend in 2023-24. NSE's 51%--and BSE's 55%--jump in cash market turnover in 2023-24 marked a departure from the previous year (2022-23) when the turnover fell 20% on NSE, and also fell 23% on BSE.

Shares of BSE, which are listed on the NSE, was up 30% year to date as of Thursday. Investors have clearly been anticipating the impact of the sustained turnover the earnings performance of the exchange.

In Jan-Mar the equity derivatives notional turnover of BSE rose 54% sequentially to 4,336.45 trln rupees, while the options premium turnover rose still higher by 82% to 2.98 trln rupees. Over 99% of BSE's equity derivatives turnover is in options contracts, while that in futures contracts is negligible.

The BSE was charging a nominal flat fee of 500 rupees per 10 mln rupees of premium turnover till Oct 31.  The exchange changed it to a slab based structure from Nov 1 which, along with rising equity options premium turnover, resulted in a sequential jump in transaction charges income from equity derivatives in Oct-Dec. The equity options premium turnover in Oct-Dec jumped 3.1 times to 1.61 trln rupees and along with the slab-wise transaction charge structure it led to the transaction income from equity derivatives jumping to 566 mln rupees from 49 mln rupees in the previous quarter.

Further, in the March quarter, for which the earnings will be disclosed by the BSE this month (April) or next (May), the exchange recorded a 42% sequential rise in its cash market turnover to 5.74 trln rupees. In the December quarter, cash market turnover went up sequentially by just 8.6%.

A sharp increase in volume or turnover is undoubtedly a key lever of topline growth for a stock exchange, according to Prayesh Jain, senior vice president and research analyst-institutional equities, at Motilal Oswal Financial Services. "Given the trend of turnover on its equity futures and options and cash segments, the BSE's transaction charges income would do well," Jain said. 

There was a 68% sequential jump in the BSE' consolidated total transaction charges income in the December quarter to 1.66 bln rupees. This was led by a 15% rise in equity cash segment transaction charges to 693 mln rupees, and a 11.5 times jump in equity derivatives transaction charges to 566 mln rupees. The share of equity derivatives transaction charges to total transaction charges moved up sharply to 34.1% in the December quarter from 5% in the previous quarter, and is expected to rise further in the March quarter due to the 82% sequential jump in premium turnover.

In the longer period, that is in the first nine months of 2023-24, BSE's consolidated transaction charges income has jumped 83% on year to 3.31 bln rupees, with 18.6% share of equity derivatives segment. In the corresponding period a year ago equity derivatives segment contribution was negligible.

Clearly, the stock exchanges' topline have gained from the sustained sharp growth in equity derivatives turnover in the last one year. A report by rating agency, ICRA, earlier this year attributed the phenomenon to multi-fold increase in retail investor participation, launch of new index options, miniaturisation of contract and lot sizes, and separate weekly expiries for each index option.

Going forward, volatility in the stock market will determine whether the trend can sustain for a few more quarters. Volatility is a friend of equity traders, and volumes tend to rise significantly during times of volatility. Further, steps like NSE's recent cut in transaction charges in its equity cash and equity derivatives segments, is likely to make it more cost-effective for equity traders.

But there is a caveat. Transaction charges is a key but not the only driver for BSE's consolidated net revenue from operations, given the fact that it made up for 36.7% of the total revenue in Apr-Sep. "The topline growth of BSE has other growth levers too such as listing fees and mutual fund platform," according to Jain.

He further said that profitability could get dragged if BSE incurs high clearing and settlement charges paid to NSE's clearing corporation as a part of interoperability in clearing and settlement on the two exchanges. Jain also said that any sharp increase in settlement guarantee fund corpuses for different trading segments would also be a drag on profitability.

Vexatious MCX tech platform issue needs fast resolution

By putting the technical issues around Multi Commodity Exchange's new trading, and clearing and settlement, platform, earlier set to go live on Oct 3, before its technical advisory committee the Securities and Exchange Board of India may has rightly played it safe.

Such a vetting of a new system of a market infrastructure institution is perhaps a first, but is welcome if the additional scrutiny in the case of MCX helps in mitigating the inherent risks of a complete switch to a new technology platform from an existing one. The exchange has a 98% turnover share in commodity derivatives market in the country, which means any problem in its systems can have wide ramifications.

MCX's existing trading and clearing technology system is that of 63 Moons Technologies, formerly Financial Technologies (India), which was a promoter entity till around 2013, while the new technology system has been developed by Tata Consultancy Services.

SEBI, on Sep 29, wrote to MCX to put the go-live of the new platform in abeyance. SEBI had received a letter from an investor body, Chennai Financial Markets and Accountability, demanding a parallel run of the new and old technology platforms by MCX for a minimum period of one year. The investor body had earlier filed writ petitions in the same matter before the Madras High Court which were still pending for disposal.

SEBI forwarded this letter to MCX and asked the exchange to respond to the issues raised by the investor body, which will then be discussed by a technical advisory committee in a meeting "which would be held shortly."

The issue of whether a stock exchange or a commodity derivatives exchange should run two different technology platforms in parallel in a live environment is a vexatious one given the enormous volume of orders and transactions that will have to pass through and get cleared and settled on two platforms simultaneously.

SEBI's technical advisory committee, comprising of five Indian Institute of Technology professors and directors, and two other persons, will be better placed to take a call on the technological challenges involved in the switch in technology platform by MCX.

But SEBI will also have to weigh in on non-technology implications, including the costs incurred due to a delay. MCX's new technology platform was originally slated to go live in Jul 2022 and is already delayed by 14-15 months.

It has had to pay 63 Moons Technologies for continuing the usage of its trading and settlement technology software along with support services. From October 2022 to Dec 2023 the costs have added to around 3.47 bln rupees or around 690 mln rupees per quarter. This makes up for around half of the exchange's quarterly revenue run rate.

MCX is listed on the stock exchanges, and under its current shareholding structure, the entire 100% holding is held by public shareholders with institutional investors holding around 80% and balance by retail investors. Its shareholders have already got hit by the financial implications of the delays so far.

Currently, SEBI's regulations and circulars are silent on whether a market infrastructure institution such as a stock exchange, clearing corporation, and a depository, is required to take prior regulatory approval with regard to their choice of technology platforms.

The MCX situation is therefore a challenge for SEBI. But the sooner the regulator takes a call the better it will be for the entire commodity derivatives market and its market participants.