MUMBAI: Stocks brokers on the National Stock Exchange (NSE) are worried about losing business volumes in the most widely-traded equity derivative contracts on the exchange. With NSE planning to permit Nifty options on the Singapore Exchange (SGX) this year, brokers fear foreign institutional investors are likely to trade these contracts more in Singapore, rather than in India, because of lower costs and lesser disclosure requirements there.

“It is certainty a threat to volumes here, as transaction costs are lower on the Singapore Exchange,” said a senior official of an institutional brokerage, which services foreign institutional clients.

NSE’s Nifty futures are already traded on SGX, but volumes in this contract in Singapore have shrunk in recent years in line with the trend back home. In India, many traders, including foreign institutions which mostly traded in Nifty futures in the past, shifted to Nifty options from early ’08, when global financial markets began to unravel. This is because buyers of options are liable to limited risks, compared with futures and option (F&O) contracts that can be structured to profit without necessarily betting on the market direction.

The share of index options in total turnover of NSE’s F&O segment has risen to 34% in ’09-10, from 11% in ’06-07. For index futures, the share has shrunk to 23% from 43% in the period, according to NSE data.

“While the exchange (NSE) will get a licensing fee for allowing Nifty options in Singapore, we (brokers) will take a direct hit, because any shift in volumes (to Singapore) will reduce our business,” a derivatives head with a domestic broking firm.

Brokers said the biggest beneficiaries of the step would be those global investors, who don’t want to or have not been able to register with the Securities Exchange Board of India (Sebi) to directly trade in India. Though foreign investors can trade through participatory notes — a derivative contract representing Indian shares issued by a broker to the overseas investor — the participatory note-issuing broker is expected to keep a record of its client’s identity, which can be demanded by the Indian regulator. Global investors, who bet across countries, will also benefit by the presence of Nifty options in Singapore, where derivative contracts of several markets are listed.

TS Harihar, head-derivatives at ICICI Securities, says that fears about the likelihood of foreign investors increasingly trading in Nifty options in Singapore are exaggerated. “There were similar concerns, when Nifty futures were about to start trading in Singapore, but time has proven that such fears are unfounded,” Mr Harihar said. “Volumes on NSE’s Nifty options are not just driven by foreign investors, but also retail and proprietary traders...unless Singapore manages to get such broad-based participation, volumes are unlikely to grow consistently,” he said.