Derivatives volumes crash 37% in Dec as Sebi tightens trading norms

Stricter trading norms helps cool off speculative activity

The derivatives trading volume has seen a 37 per cent month-on-month decline in December following a slew of measures undertaken by the market regulator Securities Exchange Board of India (Sebi) to curb the frenzy in the derivatives segment.

 

The average daily turnover (ADTV) for the derivatives segment (notional turnover for options segment) so far this month is at Rs 280 trillion – the lowest since June 2023—compared to Rs 442 trillion in November.

 

This is the first calendar month since the introduction of new rules, such as having one weekly expiry per exchange and higher extreme loss margins (ELM).

 

 

Industry players don’t rule out a further reduction in volumes with the higher contract sizes for weekly derivatives coming into effect from January 1. Three other decisions will also be effective from next year.

 

For Nifty 50 weekly contracts, the first weekly expiry with the revised contract lot size will be on January 2. 

 

A Sebi official recently stated that after the recent changes, notional volumes for the derivatives have dropped 35-40 per cent, while premium volumes decreased 8 per cent.

 

He said the value per contract is up substantially by 50 per cent. The official expressed satisfaction with this trend, indicating no immediate plans for recalibration. 

 

Exchanges have discontinued weekly contracts of Nifty Bank and Bankex, while the ELM of 2 per cent is now applicable to short positions on the expiry day to cover potential risks due to increased volatility. 

 

The official stated that derivatives regulations will be an ongoing process to curb aggressive speculation during expiry days in index derivatives, while prioritising investor protection and mitigating potential stability risks.

 

The turnover for the derivatives segment is now half that of September when a record Rs 537 trillion ADTV was registered amid the benchmark Sensex and the Nifty hitting record highs.

 

From their highs, the benchmark indices had come off as much as 10 per cent in less than three weeks. The sharp fall in the market has also impacted trading volumes, indicating a cautious approach by the traders.

 

"Sebi norms have impacted the volumes. The campaign going on for the last few months on investor and trader awareness on risks and pros and cons in the derivatives market have also made new entrants conservative while taking positions," said Kranthi Bathini, director, equity strategy, WealthMills Securities.

 

Sebi’s measures on the F&O front followed its earlier study of over 90 per cent of individual traders incurring losses in the derivatives frenzy.

 

Some of them had continued trading even after incurring losses for consecutive years.

 

BSE’s managing director and chief executive officer Sundararaman Ramamurthy on Thursday said it was too early to measure the impact on volumes and the revenues of the exchange.

 

“The income earned is based on premiums. One part of the expenditures is based on notional and another is based on the number of contracts. If the quality of premium improves compared to the fall in notional and the fall in the number of contracts traded, then it will lead to an advantageous situation. While the income will increase with premium improving, the cost will come down with the number of contracts coming down,” he said in an interaction with CNBC TV18.

 

Sebi’s measures on upfront collection of the premium and removal of calendar spread benefits on expiry day will be effective from February 1, 2025. Intraday monitoring of positions will begin from April 1, 2025.