BSE\'s Derivative Business Analysis and Way Ahead

Summary

BSE's Derivative Business Analysis and Way Ahead

India's 2nd largest has been on roller coaster ride on the back of the relaunch of equity derivative business in May-2023.

Let's do some business analysis of BSE's Hot Business Segment and Way Ahead

1. Market Share - BSE has achieved notable success with its SENSEX contract, even in the considerably larger equity derivatives sector largely controlled by NSE. Presently, the SENSEX contract caters to roughly 40% of NSE's derivatives volume linked to NIFTY. However, the introduction of the BANKEX contract by BSE is expected to extend its influence over approximately 95% of NSE's derivative volume. This significant development has granted the exchange a remarkable market share of approximately 9/3% in terms of notional and premium.

2. Option Pricing - The current option pricing at BSE is merely a fraction of what NSE offers, a situation that is unlikely to be sustainable. It's anticipated that a pricing adjustment will take place soon, and we've already seen a threefold increase in options pricing. Yet, it still remains at a discount of about 57% compared to NSE's pricing. Currently, BSE charges approximately 1 basis point (bps) on options premium, while NSE charges around 7 bps. Under the new management, pricing discounts are being phased out in most segments, except for derivatives. Clearing options costs around 1 bps for both exchanges. It's important to note that BSE is not generating profits in the derivatives segment, which makes a pricing adjustment inevitable. However, the extent of this adjustment may vary. Considering past pricing actions, it's probable that the pricing will align more closely with NSE's rates in the future.

3. The Big Change - BSE implemented incremental derivative turnover charges with effect from 1st November 2023. This is the main reason why BSE stock surged 12% on 22nd Oct-23. 


4. Overall similar to Derivative, BSE's cash market share is very small and yet to pick up

5. Key Growth Drivers for BSE going ahead

6.  The various sources of Revenue for BSE


7. BSE is itself a conglomerate of financial services




Last but the least - BSE's increased charges in derivative business need to be monitored along with retaining and increasing market share in the derivative business. Further launch of other equity derivative products is the key metric to be watched out