NSE gets SEBI nod to launch midcap index futures

Currently, NSE offers futures & options only on large-cap indices and stocks

National Stock Exchange of India said it received approval from market regulator Securities Exchange Board of India (SEBI) to launch derivatives based on the Nifty Midcap Select Index. The Exchange will launch these index derivatives from January 24, 2022.  

“The current availability of index derivatives on the exchange is largely focused on either the large cap stocks or sector specific stocks. The midcap stocks account for around 17% of market capitalization. The launch of derivatives on Nifty Midcap Select index will provide participants an additional hedging tool to manage their portfolio risk effectively,” the exchange said.

Derivatives refers to a traded instrument whose value is derived or calculated using a formula from the value of another traded instrument or index or commodity.

NSE already has several derivatives on indices such as Nifty 50, including both future contracts as well as options.

Futures, as the name implies, is a bet on the future value of the underlying commodity, index, stock or security, while options are ‘guarantees’ given against unusual increase or decline in the value of the underlying index or commodity or stock.

Besides derivatives on largecaps, India’s largest exchange also has futures and options trading on stocks, some of which are classified as Midcap. However, it doesn’t have such contracts based on indices of Midcap stocks.

NSE said it will offer both futures and options on the Nifty Midcap Select Index.

These will have a trading cycle of seven weekly expiration contracts (excluding the monthly expiration contract) and 3 serial monthly expiration contracts.

Midcap stocks refers to stocks that have a capitalization or value in the mid-range, and are distinguished from large-caps and small-caps.

Midcap stocks tend to rise after largecap stocks have rallied, and fall before largecaps fall, and are therefore suitable for those with a high risk appetite. They also often rise more and fall more compared to largecaps.

The volatility of Nifty Midcap Select Index was 22.45% in the last 1 year as compared to 15.62% for the Nifty 50 index and 22.99% for the Nifty Bank Index

The NSE Nifty Midcap Select Index has delivered a return of 38.73% in the last 1 year and 19.04% annualized returns in the last 5 years ending December 2021.

The assets under management of equity oriented mutual funds schemes categorized solely as midcap schemes saw a jump of 82% from Rs 83,839 crores ending November 2019 to Rs 1,52,893 crores ending November 2021, said NSE, explaining the rationale.

It further pointed out that in the secondary market on NSE, the daily average turnover of stocks classified as midcap has increased by 61% from Rs 5,798 crores in CY 2019 to Rs 9,331 crores in CY2020 and by a further 63% to Rs 15,220 crores in CY2021.

In terms of investor participation, 3 out of 5 investors transacting on NSE’s equity segment have transacted in these midcap stocks in CY 2021.

Institutional investors – domestic and foreign – accounted for 15.7% of turnover in these stocks on NSE’s equity segment in CY2021, the exchange said. 

The daily average turnover of stocks classified as midcap stocks jumped 83% from Rs 10,640 crores in CY 2020 to Rs 19,513 crores in CY2021. 

The Nifty Midcap Select index portfolio has a comparatively lower correlation of 0.76 with Nifty 50 Index and high beta of 1.10. 

The index options will be European style with strike interval of 50 and strike scheme of 30–1–30 (OTM-ATM- ITM).