InvestorQ : I am a trader in futures and options. I wanted to know how interoperability will make a difference to my trading performance.
Mary Joseph made post

I am a trader in futures and options. I wanted to know how interoperability will make a difference to my trading performance.

sara Kunju answered.
2 years ago

As a trader in futures and options, there are a number of benefits that you can get from the interoperability. This is all about making the trading seamless across the clearing corporations so that you can make better use of the margins deposited. Therefore, capital allocation and smart margin usage become a major advantage. Interoperability can lead to efficiency in capital usage and save costs for the investor. In the process it reduces their transacting cost and also compresses their break even for each trade.

Today, there is a major problem when you trade across multiple exchanges through the same broker since you effectively end up paying double margins. Now the same client, can be eligible for netting the benefits for his trades in a given security across the exchanges. As a result, dual capital and margin allocation may not be required.

Let us also look at the F&O front. Futures and options traders often play on the price differential in futures across months. This is popularly referred to as a calendar spread contract. For example, traders can play on calendar-spread margins between near- and far-month contracts between exchanges, which are currently not possible. Currently, calendar spreads across exchanges are not feasible since you need to put margins with both the clearing corporations. Now post interoperability, you only need to put one margin.

There is also a wider choice available to the trader in F&O. It opens up opportunities for trade in different instruments across exchanges for an investor and result in better service. For example, a Nifty trader can be indifferent whether they want to hedge their portfolio with Nifty futures or with Sensex futures and choose whichever gives them a better Beta Hedge. Currently, if my stock portfolio is on the NSE, then I need to hedge with NIFTY futures due to higher cost even if I know Sensex is a better fit for my hedge. That problem is resolved post interoperability.

One major problem is what happens if one of the exchanges or if one of the clearing corporations has a technical issue? In such cases, closure of positions becomes a major challenge. Interoperability saves participants from routine glitches arising in case of problems in a particular exchange or the clearing platform. Execution risk is a major risk for all investors/traders; whether big or small. Interoperability separates the execution risk from the settlement risk, thus allowing traders to seamlessly square off their positions in case of stock exchange outages or other technical issues at the other exchange.