Bank Nifty expiry change: Are regulators getting whiff of concentration risk?

A joint press release from BSE Ltd and the National Stock Exchange, announcing a change in the expiry day for Bank Nifty back to Thursday from Friday, has surprised the market. It was less than a month since the day was changed and it is now being reverted.

The first change by the NSE—from Thursday to Friday—had sparked chatter in the matter. BSE insiders alleged that the move was aimed at killing volumes in its (BSE) derivatives segment just when it had introduced weekly options contracts in the Sensex and Bankex. NSE insiders claimed the change was a response to feedback from market participants that the Nifty and Bank Nifty should have different expiries, as it would allow them to focus better.

But the second change is intriguing, to say the least, and the press release makes for interesting reading. It says that the BSE requested the NSE to consider shifting of the Bank Nifty expiry to any day other than Friday, as it would otherwise potentially impact the growth of Sensex or Bankex derivatives. Obviously, the NSE would have known the effect of its decision to move Bank Nifty expiry to Friday would have on BSE’s derivatives segment. That’s because one of the unique selling propositions of BSE’s weekly index options was that its expiry was on a day when there were no other contracts expiring.

And this line too is puzzling: “Considering the need for balanced market development and avoidance of concentration risk in the market, BSE has requested NSE to consider shifting of the Bank Nifty expiry to any day other than Friday.” The NSE has agreed to the request and shifted the expiry of Bank Nifty back to Thursday.

Clearly, it is not the BSE to worry about market development and concentration risk. That responsibility rests with the Securities and Exchange Board of India.

These factors considered, there is a reason to believe that the regulators may have had a say in the matter, though the announcement makes it look like the two exchanges set their personal pride and commercial considerations aside in the larger interest of the market development—the BSE by requesting for a ceasefire and the NSE by magnanimously granting it.

The BSE has been making a case for market concentration risk—NSE accounts for 93 percent of cash market volumes and is a near monopoly in the derivative segment—and the regulators seem to be listening.

NSE’s decision to shift Bank Nifty expiry to Thursday provides some respite for BSE. The good news here for BSE is that it now has a fair shot at growing its index options segment. At the same time, it cannot count on the ‘magnanimity’ of NSE beyond a point. After all, NSE has its own set of shareholders to answer to. As the market grows, both BSE and NSE will be launching derivatives on newer indices. And, unless BSE plans to launch all its future options contracts on a Friday, it will be competing with the NSE on other days of the week.

Regulators too are likely to be extremely selective in their intervention, as they cannot be seen as being partial. Concentration risk is a reality in many other markets which have just a single stock exchange.

The big task for BSE right now is to get more institutional investors to trade on its platform; at present it is a preferred platform for institutional block deals, but not so for regular transactions. Second, as mentioned in the press release, BSE will have to make good on its promise to “strive hard provide innovative and complimentary products to the market.” Only these can really change the bourse’s fortunes in the long run.