India's two major exchanges have released details of liquidity enhancement programme for equity derivatives following a recent circular from national regulator the Securities and Exchange Board of India allowing such schemes.
The National Stock Exchange (NSE), which currently accounts for around 80% of Indian equity market share according to Thomson Reuters, will introduce a liquidity enhancement scheme for S&P 500 and Dow Jones Industrial Average (DJIA) contracts on 15 September. Meanwhile, the Bombay Stock Exchange (BSE) will go live with its own two-stage liquidity enhancement incentive programme for derivatives based on the SENSEX index and its underlyings on 28 September.
In June 2011, SEBI permitted Indian exchanges to introduce liquidity incentives for new and illiquid derivatives products for a maximum duration of six months.
The NSE's scheme will be open to members of the exchange and their clients. It will offer a three-tier incentive structure at the order level, trade level and open interest level. At the order level, market participants that fulfil certain criteria – such as minimum order sizes and a presence for at least 70% of trading time – will be rewarded on a proportionate basis from a pool of 18 million rupees allocated for this purpose. At the trade level, the first market participant to reach 10 million rupees of trading value in futures and/or premium value in options will also receive proportionate incentives, as will the top five participants in terms of open interest.
Furthermore, the NSE will waive transaction charges for S&P 500 and DJIA contracts until 29 February 2012.
The BSE will run two incentive programmes, which it hopes will create “lasting, self-sustaining liquidity” in its derivatives segment.
The first will run from 28 September and 15 October and is designed to help the exchange's members test their trading systems as well as offering them volume-based cash incentives and favourable transaction fees for SENSEX-based products.
In the second stage – due to run for six months from 26 October – the BSE will offer volume-based and open interest incentives plus reduced transaction fees. The incentives will be split between general market participants and market makers, with the latter being subject to higher volume incentive rates.