BSE to start futures on June 9

Trading will commence with one month, two month and three month contracts on the 30-scrip Sensitive index of the exchange, expiring on the last Thursday of the month. To ensure that small investors stay away from futures, Sebi has mandated a minimum contract value of Rs 2 lakh.

All futures contracts on BSE will have a multiplier of 50 and a tick size of 0.10 (equivalent to Rs 5). The final settlement will be on the last trading day (Thursday) and the final settlement price will be calculated based on a set of 120 cash Sensex values taken in the last half hour of trading.

The 20 highest and 20 lowest values will be ignored and the final settlement price will be computed as an average of the remaining 80 values. According to sources, the first series of contracts will be of 20 days, 1 month 20 days and 2 month 20 days approximately to coincide with the last Thursday of June 2000.

NSE’s futures contracts will be based on its 50-scrip Nifty index. Both the exchanges have been furiously preparing for this event, which is expected to be a momentous occasion for Indian bourses affording institutional investors and mutual funds a risk hedging mechanism.

NSE has been set for derivatives trading for the last four years and in the recent past has maintained a low key approach in its run up to the event. BSE’s preparations started more recently while it has kept everyone on tenterhooks as to its actual launch date.

Index futures are basically futures contracts where the constituent scrips of the market index form the underlying asset. Introduction of these derivative products will give investors the facility to hedge, speculate and arbitrage. Arbitrage, with index futures, will be possible between the cash market and the futures market and between one month-two month contracts, two month-three month contracts and between one month- three month contracts.

The BSE has developed the online Derivatives Trading and Settlement Software (DTSS) which takes care of trading, settlement, risk management, default handling and collateral management. Every member of the derivatives segment is required to have two approved users who have passed the Sebi-approved certification tests conducted by BSE in coordination with NIIT.

An investor can, instead of buying/selling the shares composing the index or increasing/decreasing his direct scrip exposures, hedge his market risks by buying/selling futures contracts depending on whether he has a bullish/bearish view on the overall market.