How do you see BSE balancing between expanding new product offerings, strengthening technology infrastructure, and protecting the profits? As investor participation and competition evolves, what will guide your decision-making process on which of these areas should get the strongest focus in the coming quarters?
I'm not sure whether these objectives that you are talking about are conflicting. Actually, I feel they are complementary. As MII, we don't strive hard to protect the top line or bottom line. We try to provide services which will suit the market's requirement and fulfill the market's demand for products and better the economy in terms of capital creation. When we adhere to this process, naturally and necessarily infrastructure building becomes part and parcel of it, and profits becomes an automatic outcome, and therefore we don't have to go towards making profit as a specific goal. So our focus will continue as what it was. It will be deepening and broadening market, enhancing customer delight, and in the process help in the capital formations for the economy. All our product introductions will be keeping in mind these broad strategic objectives and this is what will be guiding. We are very confident and sure when we pursue these objectives, profit is a natural corollary that will be happening.
As BSE plans for the next few quarters or next few years, which financial signals or metrics will be most important in guiding decisions on cost control, cash flow management, and capital allocation for technological investments? How do you see these particular levers shaping BSE's ability to protect the margins and deliver sustainable value as the exchange business grows?
Protecting margin and managing cost is a continuous process. So it doesn't get driven by any one particular objective. Ultimately, the overall objective what MD sir mentioned is what guides us in terms of maximizing capital formation, maximizing providing best infrastructure to the market, and we get guided by the development of the market. As it's mentioned, cost control, is a guiding regular process which we continue to manage.
What we have seen in the last few months is commodities has emerged as a key segment of interest for both HFTs as well as retail traders. How are you seeing that category, and is that a category of interest that you would like to build in the coming years?
As you would recall, BSE commenced its journey in derivatives very late and very recently, somewhere around some 30 plus months back. We started it from scratch, and therefore we needed to consolidate ourselves, put ourselves in a growth path, and the policy of deepening and broadening of markets and customer delight were to be achieved. So, I think slowly and steadily we are reaching there. And we do recognize the fact that commodities are very important underlyings from a nation's perspective, and its overall economic development. So clearly, once we feel well-stabilized in what we have started to do and once we feel we are resilient, we will certainly be embarking on all the available opportunities including commodities, with the same seriousness with which we took derivatives for equities.
When would you think that you have become resilient on the equity derivative side so that you can pursue these new opportunities?
Honestly, 30 plus months before when I started, I never thought I will reach this place in 30 months. So it's very difficult to put a timeline. It can be anything. So, the passage of for us in equity derivatives has been really swift. We hope the same way we progress further, so that we can take up other areas.
My question is on stock options - how do we kind of scale up that segment? Is it linked to the cash volumes? And what are the efforts, and what are the plans for that particular segment? Because I think that's a decent part of the industry volumes in terms of premium turnover, and the premium to notional is also significantly better there. What are the thoughts on that particular category over the medium term?
BSE always looks for product diversification in its portfolio. Certainly, therefore, stock options would be one of the areas which we will be looking into. As you would be knowing, comparatively stock futures were more attractive products for the market compared to stock options, and stock options were therefore getting slightly lesser attention compared to stock futures. And as I said previously, we recently started our journey, just around 30 months before, and it was fortunate for us that we were able to grow to the level where we are. Now our primary focus has been at this point of time on our cash market volumes and bringing in level playing field there, and ensuring other than the current week options gaining traction. Slowly we are progressing there. At the appropriate time, like what we talked about commodities, we will be putting in efforts for stock options as well to gain momentum at BSE, and use the existing infrastructure of market participants and technology, so that we can leverage on it, and provide a very good alternative competitive platform for the market participants.
Is there any linkage between cash volumes having a low market share on cash volumes and stock options? Would there be any linkage in that sense?
It is very difficult to say that because the market microstructure is not that easy to predict. Whether the stock market volumes will increase, stock options volume or vice versa will happen or they will continue to exist. See today, if you look at it, the cash market is fungible across exchanges. The stock options, in a way, are fungible across exchanges. So I don't know whether there is any prerequisite of one to be present in the same exchange or the other. So it's very difficult to give an answer in that sense. The stock as a underlying is very active in Indian markets. That in itself therefore should be sufficient for picking up stock options. Probably it may not be venue sensitive. That is one view, but we have to wait and see how it unfolds.
Two clarifications. First, did you say that you are nearly at 150% of your core SGF requirement and to that extent, the incremental contribution will not be there from the coming quarter, or it will come down? Secondly, the increase in the STT that has happened on the futures side, would that in any way directionally, can the volume shift from futures to either equity options or cash? Is that a possibility?
As far as the SGF, if you look at it, most of the time, what we talk about SGF is more on a retrospective basis. On a prospective basis, it is not very amenable for prediction. That is why a adhoc number of 5% and 150% were arrived at by us to prevent any shocks. In this quarter, with the type of parameters that we have seen, we found that there was no need for us to contribute the entire full 5% and we restricted somewhere around 3% plus, I guess, because we touched the top line of 150%. Will the same thing will continue, and therefore there will be no need for any contribution in the next quarter? No, it is not predicted that way. As we always maintained, the algorithm for computing the SGF requirement is a complex one, and therefore, depending upon what is the highest open interest and other things in the next quarter, there may be a need for contributing or there may be no need. The move is not to predict and prevent, the move is to normalize so that there are no sudden jerks. As far as the STT is concerned, the way the futures STT is structured, I think it is more to encourage people, particularly retailers, to think of participating in longer term equity, and for mutual funds and others to think about longer term futures instead of monthly futures. So that could be the result. Options at this point of time, for various reasons in the growth trajectory, because of that, while the growth may be slightly slower compared to what it was, I think it will still grow and may not show any severe impact because of the STT increase. All these are what we consider could be truth. The time will tell, what is the right thing, and maybe we have to wait and watch to see what type of reaction the market has, because the market cannot be just predicted with our own understanding. The market is complex, and so we will have to wait and watch.
On the Core SGF contribution - the limit that you have in mind, how much runway for that is left? Could you give some colour on that?
At this point of time, if you recall, we decided to contribute 5% till we reach a threshold of 150%. In this quarter, we have reached the threshold of 150%, limiting therefore the requirement to contribute the amount to lesser than 5%. That is where we stand.
My question is on the strategic direction that you laid in terms of gaining market share in the cash segment, and also improving on the monthly contribution in the options side, and also the institutional participation. Where are we in that journey - maybe you can update us versus last quarter's commentary? Also, in terms of the market share in colocation and clearing corporation - we are at around 14%-15%, in Clearing Corp we have gained to around 25% to 27%. Is it fair to assume that these market shares will converge to our options market share eventually?
On the cash market segment, clearly we felt there need to be a level playing field in the market, which was absent. So with lot of regulatory advocacy, common contract notes were brought in place. What we are understanding from the market participants is that, while they absolutely realize the benefits of common contract notes, when they seek algo approval, so that the SOR can be implemented and best price execution could be implemented for the market participants, there are quite a few bottlenecks that they are encountering. We are very confident that wisdom will prevail and the market will be ready to embrace competitiveness with open mind so that the market participants get the benefit of best price execution and become exchange agnostic. More and more participants are getting aligned with this, particularly mutual fund and insurance companies have started seeing the benefits of embracing this path and getting the benefits of best price execution. As far as long-term rather, other than the current weekly expiry, our market share within that has started growing. And earlier we were nothing there in the next week and next to next week. Today we are very proud to say including the monthly, other than the current week, total volumes of around 5% comes from that. This is a starting process and we will be going further ahead. On colocation - we never started as a profit center. Deepening and broadening of markets was a necessity for us, and without colocation, it could not have happened. It is incidental that we put in place colocation as a requirement and it has become a profit center. At this point of time, we are planning to allocate 80 more racks which is in the offing soon, which way and how will depend upon multiple factors. With that we will be having around 500 racks in place. Currently, the colocation revenue is somewhere around Rs. 45 to Rs. 48 crores per quarter. We think it could get stabilized at that level if we are not planning to increase any charges, which at this point of time will not be done ad hoc; it will be only at appropriate time, appropriate levels. As far as Clearing Corporation is concerned, we have put in lot of efforts to improve the technological supremacy and efficiency of Clearing Corporation. Traveling from 3,000 trades per second per member in clearing corporation, that capability to 27,000 which we are doing now, in itself was a great achievement. And there is still a long way to go, we will strive hard to provide the best of services so that there is a level playing field in the market in the area of clearing as well.
Congratulations considering or looking at January number where Sensex is higher than the NSE in terms of notional turnover Nifty. My question is on the charges - to my knowledge, premium compared to the turnover, we are charging lower than the NSE. What is the plan to increase the same?
At this point of time, the charges that we make are around Rs. 250 lower on a per crore basis. If you recall, we started our journey with no charges, then we went into Rs. 500 rupees, and then we slowly increased it to some mid-level, and then we ultimately landed up with the current charges that we are. Charges are not fixed and written in stone, certainly they have some scope for further increase. As I always say, depending on the market's capability to bear the cost, there are multiple costs that are evolving in the market. Profit cannot be a sole objective for an MII, it also has other responsibilities. Keeping that in mind, any increase in charges, will be considered at an appropriate time for appropriate reasons, and after considering, what the voice of customer would be in this regard.
What is it that we are thinking on the recent changes that the Government has made on the STT? What are the reflections in the markets that you have started to expect that what can happen now? What are your thoughts on it?
I think you are primarily referring to the STT increase. The other part of it is, of course, with regard to the buyback, the capital gains tax. I think that's a very wonderful change. Lot of people talk about the STT, so let me take the question to reflect to that area and answer you. It had two portions, one is increasing the STT for futures, and second is for options. As I have been telling the press also before, my experience from the past is that whenever STT charges are increased for options, it has not had any meaningful impact on the volumes, and volumes have continued as before. That is the experience that I have seen from my limited knowledge of what I have seen in the market. As far as futures are concerned, I think the thought process behind the move probably could be twofold. One is to encourage long-term equity investments among retailers instead of getting into the derivatives. And secondly, to encourage longer-term future contracts which may help mutual funds and other institutions which are permitted to trade derivatives. Both if materialized will be in the interest of the market. So I think, there will be some time to adjust and re-orient for the market. And once it happens, it will be in the interest of the market, as more retail people may move towards mutual fund and long-term equity investments, and mutual funds which are doing arbitrage funds and others, may think of a longer-term option instead of monthly option, so that the cost that would be debited to the funds will get lower.
A good chunk of our growth has happened because of the futures introduction by BSE. And if the charges go up more than double on STT, wouldn't that be a problem for our growth trajectory just from a basic perspective?
It's a very valid question that you are asking. But the truth is slightly different. The growth of BSE's derivatives has been based on Sensex options volumes. At this point of time, in comparison to the Sensex options, Sensex futures are still at a very nascent stages of growth. Because it is at a small level, I don't think it will have much impact because of any increase or decrease. If it had been a significant chunk, there is a probability for us, to rethink on what could be the strategy for futures. Since at this point of time, it looks like more a supporting volume for options that is happening in very nascent stages, we do not find any impact specifically coming on Sensex futures because of the change. So this is more of a neutral news for us, rather than a negative news for us or an impact on our direct business.