The Securities and Exchange Board of India (SEBI) is set to release a consultation paper on index derivative tenures, potentially reshaping the landscape for stock exchanges in India. This move could significantly impact the earnings of exchanges, particularly the BSE .

Potential Impact on BSE

According to a report by Nuvama Institutional Equities, the proposed changes could have varying degrees of impact on BSE's earnings:

• Fortnightly Expiries Scenario: Could reduce earnings per share (EPS) by 26.80-32.00%
• Monthly Expiries Scenario: Might cut EPS by 36.60-38.50%

Worst-Case Scenario

The most severe scenario modeled by Nuvama involves both the National Stock Exchange (NSE) and BSE being limited to single monthly expiries on the same day. This could have drastic consequences:

• Potential collapse of BSE's average daily premium turnover by over 80%
• Turnover could drop to approximately Rs 29,000.00 crore

SEBI's Concerns and Recent Actions

SEBI's move comes in the wake of surveys indicating heavy retail losses in the options market. In response, the regulator has already implemented measures such as delta-based open interest calculations to address these concerns.

Market Reaction and Analyst Outlook

Despite the potential risks, Nuvama maintains a positive outlook on BSE:

• Rating: Buy
• Target Price: Rs 2,820.00

BSE's stock performance:

• Current trading price: Rs 2,219.00 (up 0.80%)
• Six-month gain: Nearly 70%

Looking Ahead

As the market awaits SEBI's consultation paper, stakeholders will be keenly watching for the final decision on index derivative tenures. The outcome could have far-reaching implications for exchange earnings and the broader derivatives market in India.

Investors and market participants are advised to stay informed about these potential regulatory changes and their impact on the stock exchange landscape.

Jefferies, a prominent global financial services firm, has issued a warning about potential significant earnings cuts for BSE (formerly Bombay Stock Exchange) and Nuvama, should the Securities and Exchange Board of India (SEBI) implement changes to the expiry cycle of index derivatives.

Potential Impact on Earnings

According to Jefferies' analysis, the proposed changes could have far-reaching consequences for both companies:

• BSE: The exchange could face a substantial 20-50% reduction in earnings per share (EPS) by fiscal year 2027.
• Nuvama: The financial services company might see a 15-25% decrease in earnings.

Scenario Analysis

Jefferies has outlined different scenarios based on potential changes to the derivative expiry cycle:

Fortnightly Expiry Cycle

• BSE: Earnings could drop by 21-35%, depending on the timing of expiry.
• Nuvama: A potential 15% impact on earnings.

Monthly Expiry Cycle

• BSE: A more severe impact with earnings potentially declining by 41-50%.
• Nuvama: Earnings could see a 24% reduction.

Market Response and Regulatory Uncertainty

Despite these potential impacts, BSE shares gained 2.70% to reach an intraday high of Rs 2,223.00 following reports that long-term F&O contracts are not on the agenda for Sebi's board meeting. The stock had previously fallen 8% in two sessions due to reports that the regulator was planning a consultation paper to end weekly expiries for futures and options contracts and shift to monthly expiry.

It's important to note that these projections are based on speculative changes to the derivative contract expiry cycles. SEBI has not yet provided any official confirmation regarding such modifications. The Sebi Chairman had previously indicated that the regulator sees a need to extend equity derivatives tenure and will issue a consultation paper on longer-duration F&O contracts, clarifying this is only a thought process requiring industry consultation.

Recent Regulatory Measures

The regulator has recently implemented measures including delta-based calculation of open interest and changes to market-wide position limits.

Next Steps

Jefferies has indicated that it will be closely monitoring SEBI's upcoming Board Meet, scheduled for Friday, for any clarification on these potential changes. The meeting could provide crucial insights into the regulator's stance on derivative expiry cycles and their potential impact on market participants.

Market Implications

If implemented, these changes could significantly alter the landscape for derivatives trading in India. The potential earnings impact on major players like BSE and Nuvama underscores the far-reaching consequences of regulatory decisions in the financial markets.

Investors and market participants are advised to stay tuned for any announcements from SEBI and to consider the potential implications of these changes on their investment strategies and market outlook.

As of the latest update, BSE shares were trading at Rs 2,218.00, up 2.56%, and have rallied over 65% in the last six months.