Sebi tightens F&O rules to curb derivatives market frenzy: What has changed

India’s market regulator tightened the rules for equity derivatives trading on Tuesday, raising the entry barrier and making it more costly to trade in the asset class, despite pushback from investors.
The Securities and Exchange Board of India (SEBI) lowered the number of weekly options contracts available to trade for investors to one per exchange and raised the minimum trading amount nearly three times, according to a circular uploaded on the regulator’s website.
Reuters first reported SEBI’s intent to tighten its derivatives trading rules, in line with proposals it made in July, last month.
The minimum trading amount has been increased from 500,000 rupees ($5,967) to 1.5 million to 2 million rupees, SEBI said in the circular.
The measures are effective Nov. 20.
SEBI said that existing regulatory measures have been reviewed to ensure investor protection and the orderly development and strengthening of the equity derivatives market.
Indian authorities had raised concerns about the unchecked explosion of retail investor trading in derivatives and the possibility that it could create future challenges for the markets, investor sentiment and household finances.
The monthly notional value of derivatives traded was 10,923 trillion Indian rupees in August – the highest globally, data from the regulator showed. Bulk of trading happens in options contracts linked to stock indices like BSE Sensex and NSE’s Nifty 50.
A SEBI study published last month showed that individual Indian traders made net losses totalling 1.81 trillion rupees in futures and options in the three years to March 2024, with only 7.2% making a profit.
For the 12 months to March 30, 2024 retail investors made gross losses totalling 524 billion rupees but proprietary traders, acting on behalf of financial institutions, and foreign investors made gross profits of 330 billion rupees and 280 billion rupees, respectively.
Exchanges and brokerage firms which have been the biggest beneficiary of India’s derivatives markets trading boom are considering changes in strategies to minimise the impact.
Zerodha, India’s largest broking firm, said last month that derivatives are a significant portion of its revenue and it anticipate a 30% to 50% drop in revenue due to the changes.
Angel One, a listed discount broking firm, said during an earnings call said that it is considering increases charges on its other services to reduce impact on revenue.
Indian exchanges BSE and NSE, which run multiple weekly options contracts, with one contract expiring daily, will now need to choose one weekly contract.
BSE and NSE had no immediate comment when contacted by Reuters.
This change follows the regulator’s observation that there is hyperactive trading in index options on expiry day.
Margins for short options contracts have also been increased by 2%.
In a separate circular, the regulator also asked exchanges to increase their risk management measures for equity derivatives and directed them to increase the collateral for these contracts.