SEBI’s six-step procedures have been seen to reduce F&O volumes by as much as 40% According to a recent report by the watchdog, the initiatives aim to increase the entrance hurdle for ordinary investors, whose losses have been increasing.
Volumes might decline significantly, possibly by 30–40%, as a result of the Securities and Exchange Board of India’s (Sebi) six-step proposal to limit consumers involvement in speculative index derivatives.
The goal of these steps is to curb excessive speculation in the futures and options (F&O) market, where daily turnover sometimes surpasses Rs 500 trillion and regular investors frequently lose their investments.
Sebi has agreed to raise margin requirements, mandate upfront option premium collection from purchasers, and increase the contract size from Rs 5 lakh to Rs 15 lakh.
The new regulations will also eliminate the calendar spread treatment on expiration days, provide intraday monitoring of position limits, and restrict weekly expiries to one benchmark per exchange.
According to recent research by the watchdog, the moves are intended to raise the entrance hurdle for individual investors whose losses have been steadily increasing.
Analysts had predicted that the restrictions may result in a nearly one-third decrease in trading on the National Stock Exchange (NSE). September saw an average daily trading volume of almost Rs 144 trillion on the BSE and Rs 394 trillion on the NSE for the cash market sector.
“On the NSE and BSE, limiting weekly expiries to a single index may promote a shift in trading volume toward GIFT City, which continues to have a greater selection of weekly choices. From the standpoint of international inventory investors, this presents a compelling opportunity for those looking for trading techniques with flexibility, according to Rohit Agarwal, CEO of Dovetail Capital’s funds division.
“GIFT City, while expanding, accounts for less than 1% of the NSE’s business with around 2 million contracts traded monthly, but the NSE continues to be the leading player with an average of 10.8 billion equities derivatives contracts monthly in 2023–2024. To facilitate this move, GIFT City’s ability to increase its liquidity and market depth would be crucial, Agarwal continued.
As far as onshore trading is concerned, the impact of the new regulations on the BSE may be smaller than on the NSE, given its relatively lesser dependency on index options expiring over the week — which now will be restricted to one.
Index derivatives trading makes for a substantial share of the revenues for both brokers and stock exchanges.
The biggest broker in terms of profitability, Zerodha, has projected that the adjustments will result in a 30–50% drop in income.
To counteract the decline in revenue, stockbrokers intend to diversify their sources of income.
In the first quarter of 2024–25, the NSE earned Rs 3,623 crore from transaction fees. It was Rs 366 crore for the BSE as well. This has increased due to increased activity and is mostly the result of the F&O segment.
The market regulator has scheduled three of its major measures to take effect on November 20. The remaining two will go into force in February and April of the following year.
Sebi’s actions may reduce the exchange’s earnings by 20–25%, according to a previous IIFL Securities study on the NSE that was released in late August.
Although the goal of Sebi’s action is commendable, the worldwide trade association Futures Industry Association thinks that the new regulations may wind up driving up trading costs.
Additionally, liquidity providers may have to pay higher margin rates, which would distort the market by expanding bid/ask spreads. The contribution said that these increased spreads will be eventually borne by individual traders, leading to inadvertent extra expenses for both retail and institutional investors. The statement was made in response to Sebi’s July consultation document about derivatives limitations.
Some people think that increased entrance barriers might cause certain retail players to take on disproportionately more risk.
It is anticipated that a Sebi expert panel would track the effects of the suggested modifications and revert to the original plan if additional action is needed.
Sebi increased the size of contracts, margin, and the amount of premium that option buyers must pay up advance.
> Of the six measures, three will take effect on November 20.
More than 93% of retail traders had losses from FY22 to FY24.
Experts in the market anticipate that BSE would be less affected than NSE because the latter has more items with weekly expiry.
