The return of market volatility is causing flutters across the globe, mainly in the US and China. Last week, an anonymous whistle-blower had alleged to the Securities and Exchange Commission that rampant manipulation of the volatility indicator — VIX is costing investors hundreds of millions of dollars a month. The VIX is used by traders as a fear gauge to measure nervousness in the markets. Investors use the VIX to hedge their bullish stock bets, as the index typically rises when shares fall.

CBOE, which controls the VIX has said that the whistle-blowers’ conclusions lacked credibility and were replete with inaccurate statements, misconceptions and factual errors.

China, according to Bloomberg , stopped updating its homegrown version of the VIX Index, to discourage speculation in equity-linked options after authorities tightened trading restrictions last week.

Back home, almost four years have been completed since the launch of futures trading based on the India VIX (NVIX) by the NSE.

NVIX launched on February 26, 2014, as a weekly contract, had got off to a promising start, but interest has been absent lately. In 2013-14, India VIX futures saw a volume of 17,543 contracts and turnover of ₹2,193 crore. The number of contracts fell to 11,274 in 2014-15 though turnover increased to ₹2,256 crore. But then it was history. It last traded during February 2016 with just two contracts changing hands. Since then, there have been no takers for NVIX futures.

At the time of launch, the NSE had said NVIX contracts could offer a number of benefits to traders and investors. Traders were expected to hedge their equity portfolios and add diversification, option traders were expected to hedge against volatility. The VIX was supposed to help investors take directional views on volatility. Calendar spread (simultaneous purchase of futures or options expiring at a particular date and the sale of the same instrument expiring another date) trading was to be explored across weekly contracts.

These mixed objectives raise a serious question: Did the exchange set the NVIX up for failure by not identifying its target customers for the product?

The problem is of complexity and lack of institutional presence. Domestic banks, insurance and pension funds are not permitted to participate in equity derivatives, that leaves only retail investors, mutual funds and foreign institutional investors.

To discourage retail investors, rightly, NVIX started off with a higher contract size and the higher margins deterred retail investors and speculators from this trade.

Even if the exchanges were to target MFs and FIIs, NVIX is not suitable for them on many counts.

MFs and FIIs prefer longer duration products than adjusting their positions every week, which will add to the (transaction) cost and affect returns, as most of the time VIX stays in a narrow range. Instead of weekly, a monthly contract or even long-term (yearly) contracts could have generated some interest from them. Though India VIX is based on CBOE VIX from the US, the latter has multiple contracts with longer time-frames.

Another idea could be to have the VIX-based on popular Bank Nifty, which has both weekly and monthly contracts currently. As Bank Nifty is more volatile than Nifty, it would provide more trading opportunities.

As NVIX failed to invoke trading interest, it is high time NSE withdraws this contract and re-launches it with better features, including options on the VIX.

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