The BSE: An Evolving Entity

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V Balasubramaniam from the BSE talks about the changes the exchange has undergone in recent years including new technology and a move towards diversification.
The BSE (formerly known as the Bombay Stock Exchange) has witnessed dramatic change in the past few years. New management, new technology, a customer-focused outlook and a clear strategic shift to diversify the businesses of the exchange beyond just equity trading,have all started to have an impact. Central Depository Services (India) Limited (CDSL), which is 54% owned by the BSE, is performing well and pushing into new areas such as dematerialization and the record-keeping of insurance policies and academic credentials. BSE Institute, the 100%-owned education and training subsidiary, is expanding beyond its traditional Mumbai-base and becoming a truly national business.
Revival of the BSE Derivatives Business
Without a doubt, the most dramatic change at the BSE since September 2011 has been the revitalization of the equity derivatives business. This revival did not happen overnight. It required a complete technology overhaul – abandoning a previously used derivatives trading system in favor of a re-vamped and upgraded integrated cash/derivatives system. It also required building back up its derivatives membership ranks with over 400 members in the derivatives segment. In addition, it was helped by the introduction of a new real-time risk management system (RTRMS) and new multi-asset collateral management software (CLASS). Finally, a low-cost cloud solution called Fastrade-on-Web (FOW) was introduced to reduce the initial cost of a new member interested in trying out BSE’s derivatives segment without a big investment in infrastructure.
In addition to all these developments, the new regulatory framework to allow liquidity enhancement incentive programs (LEIPS) for derivatives has undoubtedly had a big impact. The BSE has offered a series of LEIPS programs in index futures and index options to incentivize market-making in order to build longterm liquidity in these products.
The results have been encouraging. BSE’s volumes and open interest in equity derivatives have grown steadily since the fall of 2011. Currently there is an average volume in excess of two million contracts per day. With high participation that continues to grow, the SENSEX index option contract clocks the highest volumes daily (approximately US$6 billion).


BRICS Exchange Alliance
On 12 October 2011, executives from the stock exchanges of the BRICS countries (Brazil, Russia, India and China) convened at the World Federation of Exchanges (WFE) meeting in Johannesburg to sign a memorandum of understanding (MOU) to form the BRIC Exchange Alliance. In the following months, five founding members of the Alliance – BM&FBOVESPA from Brazil, Open Joint Stock Company MICEX-RTS from Russia, BSE Limited from India, Hong Kong Exchanges and Clearing Limited (HKEx) as the initial China representative, and JSE Limited from South Africa – finalized an agreement to expand their product offerings beyond their home markets and give investors of each exchange exposure to the dynamic, emerging and increasingly important BRICS economies.

 
The initial phase of the alliance began on 30 March 2012, with the cross-listing of derivatives offered in the local currency and local trading hours of each of the exchanges. It has allowed the SENSEX brand to begin to grow outside India. Over time, we expect significant offshore liquidity to develop in some or all of these partner venues.
At the same time, the BRICS exchange alliance has brought new products to Indian investors, including:
• Brazil’s iBOVESPA futures;
• Russia’s MICEX Index futures;
• Hong Kong’s Hang Seng Index futures; and
• South Africa’s FTSE/JSE Top40 futures
BSE is working to encourage market making in these crosslisted international products, in addition to its domestic equity derivatives. In addition, BSE is engaged in long-term market development efforts to educate Indian investors about the benefits of international diversification using new international investment and hedging products.
Clearing
With effect from 24 February 2012, Indian Clearing Corporation Limited (ICCL), a 100%-owned subsidiary of the BSE began providing clearing and settlement services for trades executed on all the segments of BSE and for trades executed on the currency derivatives segment of the United Stock Exchange (USE). Clearing through a clearing corporation – which is a separate legal entity from the exchange – was mandated by the Securities and Exchange Board of India (SEBI). As part of the restructuring, however, significant new systems were introduced, notably in multi-asset collateral management and real-time risk management. The restructuring has also made it feasible for ICCL to pursue over-the-counter (OTC) clearing business and other third-party clearing business.
Equities
As a result of the new regulatory frameworks that have been put in place in the last few years, cross-exchange algorithmic trading, smart order routing (SOR), unrestricted access to exchange co-location facilities, improved order-handling capacity and turnaround speeds are all helping to improve the equities market. BSE is seeing growing involvement from new participants deploying various forms of algo trading. Displayed liquidity on the BSE order book and in many cases, the quality of the BSE quote has consequently improved. Our members report significant price improvement for their customers – in the 3-4 bps range – as a result of SOR.
SME Platform
Small and medium enterprises (SMEs) occupy a pivotal position in India’s growth strategy. They currently contribute around 12% to GDP, 45% to industrial production, 40% of exports and 15% of employment. The creation of a separate platform on BSE for SMEs now allows SMEs to access capital easily, quickly and at lower costs. Getting listed on BSE has several accompanying advantages such as visibility and risk distribution that will benefit SMEs in growing their businesses. After year-long efforts in evangelizing the platform through dozens of seminars around the country and meeting SMEs, the BSE SME platform was launched on 13 March 2011 amidst wide media attention. It has already seen three listings and it is expected that around 15 companies will list by the end of 2012.
Mutual Fund Platform
The BSE’s online mutual fund transaction platform – BSE StAR MF, completed its second year of operations in December 2011 and has retained its dominant status in the exchange traded mutual fund space with a 55% market share in FY 2011-2012.
Several notable initiatives were launched during the year in the mutual fund segment from launching a dedicated website for investors in partnership with Morningstar India Ltd., starting a facility for investors to schedule the regular investment installments, launching tax savings schemes and rationalizing listing fees for asset management companies. These marketing efforts to list closeended schemes and ETFs have paid off with the revenues in FY 2011-2012 growing by over six times compared to the previous year.
BSE now lists over 2,200 schemes of the top 29 mutual funds that collectively account for over 92% of the industry assets under management.

 
In recent years, BSE has taken large strides in technology, systems and products by introducing newer instruments and efficient market processes. Today, while BSE already has achieved global standards in terms of its trading systems, risk management systems, transparency, governance and regulatory environment, it realizes that global standards are constantly being raised. BSE aims to remain competitive and attractive as a place to do business for domestic and international participants.