Proprietary traders, or brokers who trade for themselves, extended their existing bank guarantees (BGs) and tapped the corporate bond market to sustain their equity market activity to cope with the Reserve Bank of India’s (RBI) recent curbs on bank funding.
This prevented a striking impact on prop volumes, said Sriram Krishnan, chief business development officer of the National Stock Exchange (NSE), during the exchange’s second-quarter earnings call.
The official was responding to an analyst’s query on the “tumultuous” quarter that impacted NSE’s sequential earnings.
The RBI circular (on bank funding for prop traders) was scheduled to go live on 1 April this year but was deferred by three months and took effect from 1 July. Prop traders used this postponement to their advantage.
“A number of market participants, particularly brokers getting impacted potentially have extended their prevailing BGs by several months, as much as they could, and some have raised money by issuing corporate bonds in the last few months,” said Krishnan in response to the analyst’s query.
“I think market participants have their own way of coping with any new changes being imposed by regulators and that is what is happening here, and therefore there is no striking impact as such that can be attributed to this one particular change,” Krishnan added.
Impact of regulatory changes
NSE’s second quarter earnings were impacted sequentially by the regulatory changes related to funding norms, market regulator Securities and Exchange Board of India (Sebi) implementing a closing auction session since August and geopolitical disturbances created by the West Asia war, Krishnan said.
NSE’s profit after tax fell 17% sequentially to ₹2,578 crore in the July-September quarter (Q2FY27) due to regulatory changes and the global impact of rising oil prices due to the West Asia war.
Revenue from operations fell 13% quarter-on-quarter (QoQ) to ₹4,067 crore. Operating profit declined 14% to ₹3079 crore.
On a year-on-year basis, however, net profit grew 23%, operating revenue rose 11% and operating profit more than doubled , rising 107%.
Meanwhile, the impact of the closing auction session was more pronounced on the determination of the settlement price for expiring index options than in the cash market, Krishnan said.
He added that with Sebi reverting to the pre-CAS settlement mechanism of index options from 7 December for one year, cash market activity would expand.
“There would be greater clarity on how expiring index options are going to be dealt with and therefore have one year to understand the system better and eventually if there are further changes that may be considered, they (participants) will be better prepared for oncoming changes,” he said.
Sebi implemented CAS from 3 August to ensure better price discovery at market closing through a 10-minute auction mechanism between 3:20 and 3:30 pm rather than the earlier volume-based weighted average price in the last half hour.
Following feedback from market participants, Sebi decided to revert to the volume-based mechanism for settlement of derivatives contracts for a year from 7 December.
Krishnan also said he expected NSE market share in equity options to consolidate between 70% and 72% from 68% at the end of the September quarter, with BSE holding the rest.
NSE shares listed on 24 September at ₹1,800 apiece against its issue price of ₹1,785. The stock closed 1.35% higher at ₹1803.8 on Tuesday.
