In a recent circular dated June 6th, 2023, the National Stock Exchange NSE made an important announcement regarding the F&O contract expiry schedule for Bank Nifty F&O contracts. The change involves shifting the expiry day from Thursday to Friday, impacting the futures and options contract cycle for BANKNIFTY.

This article delves into the historical significance of Thursday as the F&O contract expiry day, the reasons behind the shift to Friday, and the implications of this change.

Bite of History:

How Thursday Became the F&O Contract Expiry Day? When derivatives trading was introduced in India in June 2000, the BSE and NSE followed a 5-day settlement cycle without rolling settlements. The BSE had a Monday to Friday cycle, while the NSE had a Wednesday to Tuesday cycle for cash market trades. Since both exchanges experienced heightened volatility on specific days, it was crucial to avoid F&O settlement on those volatile days to mitigate default risk. Consequently, Thursday emerged as the only suitable day for F&O contract expiry due to the settlement cycles of both exchanges.

Shifting F&O Settlement Cycle from Thursday to Friday:

The original argument for Thursday as the expiry day no longer holds as the market landscape has evolved. Despite the introduction of rolling settlements in 2001 and subsequent compressions to T+2 and T+1, the Thursday settlement practice for F&O trades persisted. However, the NSE has finally decided to make the logical shift from Thursday to Friday, which serves as the last trading day of the week. Initially, this shift will be implemented for the BANKNIFTY contract, with other contracts expected to follow suit.

Implementation of the Expiry Change on BANKNIFTY Contracts:

To execute the shift from Thursday to Friday expiry for BANKNIFTY F&O contracts, the following steps will be taken:

1. Effective from July 7, 2023 (Friday), the BANKNIFTY futures and options expiry day will be changed from Thursday to Friday.
2. All existing contracts with a Thursday expiry will be revised to expire on Friday starting from July 6, 2023.
3. The first Friday expiry will occur on July 14, 2023, for weekly BANKNIFTY contracts. Additionally, monthly and quarterly BANKNIFTY contracts will shift their expiry to the last Friday of the respective months.
4. Other F&O contracts will continue with their current settlement cycles.

Modus Operandi of the Shift Schedule for BANKNIFTY Contracts:

The shift from Thursday to Friday expiry of BANKNIFTY F&O contracts will be implemented as follows:

1. At the end of the day on July 6, 2023, the expiry and maturity dates of all existing futures and options contracts will be revised or postponed to Friday.
2. For example, a contract originally maturing on July 13, 2023 (Thursday) will be automatically extended to expire on July 14, 2023 (Friday).
3. Likewise, a contract initially maturing on the last Thursday of August 2023, i.e., August 31, will be brought forward to August 25, 2023 (Friday).
4. Any new contracts created for trading on or after July 6, 2023, will follow the revised expiry days, with contract maturity on Friday instead of Thursday. All other BANKNIFTY specifications remain unchanged.
5. The circular’s implementation will take effect from the end of the day on July 6, 2023, and revised contracts will be available for trading starting from July 7, 2023.

Conclusion:

The NSE’s decision to shift the F&O expiry day for Bank Nifty contracts from Thursday to Friday marks a significant change in the trading landscape. While the historical reasons for Thursday expiry no longer apply, this shift aligns with the logic of having the last trading day of the week as the expiry day. Traders and investors now have the opportunity to analyze the F&O expiry data more comprehensively over the weekend, enabling them to devise more informed F&O trading strategies. For a detailed understanding of the circular, interested individuals can download it from the NSE’s website using the hyperlink provided.
https://archives.nseindia.com/content/circulars/FAOP56967.pdf
Read More!
Keep reading and supporting Banknomics!