How will Sebi's proposed F&O rules affect BSE, NSE, Zerodha, Angel One?

Sebi's proposed F&O rules impact: Exchanges and brokers focused on retail traders are likely to face the most major effects from these changes, Jayant Kharote and Prakhar Sharma, equity analysts at Jefferies said. 

This comes after Sebi proposed seven key amendments to the derivatives trading framework, aiming to bolster investor protection and market stability, on Tuesday. READ ABOUT IT HERE

Clearing members like Nuvama (Asset Services business) catering to institutional players, such as high frequency trading (HFTs) and foreign portfolio investors (FPIs), analysts believe, might experience minimal direct impact, although there could be secondary effects. For example, the removal of the Bankex weekly contract on the BSE could reduce EPS by 7-9 per cent over FY25-27.

 

“In our scenario analysis, gains from spillover of trading activity from discontinued products can offset EPS impact and in the event of moderate industry-wide impact of Securities and Exchange Board of India (Sebi) measures, can even drive earnings per share (EPS) upgrades,” Jefferies added.

Furthermore, Jefferies said discount brokers like Zerodha, Angel One, and Paytm Money, etc. will have a very high impact from tightening of F&O market and recent order on transaction charges. 

For traditional brokers including MOFSL, IIFL Securities, ICICI Sec, etc, analysts said, will have ‘high’ impact from tightening of F&O market and ‘low’ impact from recent order on transaction charges.

 

That apart, Sebi’s proposed F&O measures will remove 12 (of 18) weekly option contracts & impact approximately 35 per cent of industry premiums, analysts said.

Spillover of trading activity from these contracts into remaining products, analysts believe, can limit the impact to 20-25 per cent. 

They further said that phased hike in lot sizes (by 3-4x) and margin hike near expiry can impact retail traders. “Exchanges and retail-focused brokers will be most impacted. BSE can offset impact and even gain, if volumes spillover from discontinued products,” Jefferies said in a note.

Key changes and the impact explained:

Reduction in weekly option contracts
 

One of the most key changes, analysts said, is the reduction of weekly option contracts to one benchmark index per exchange, totaling six weekly contracts per month (down from 18). 

However, monthly contracts, which occur in the fourth week of the month, will remain unchanged.

Meanwhile, weekly premiums currently account for approximately 65 per cent of the industry's total premiums. The reduction, analysts believe, could eliminate about 35 per cent of these premiums. However, if trading activity shifts to the remaining two products, the overall impact on the market could be contained to 20-25 per cent.

Increased lot sizes to impact retail participation
 

SEBI's proposal to increase lot sizes by 3-4 times over the next six months is likely to reduce retail participation due to higher ticket sizes, particularly on expiry days, Jefferies said in a note. 

“While small retail (less than Rs 1 million monthly premiums) make up less than 3 per cent of system premiums, overall impact from their reduced participation can be magnified as they may be contributing to the profit pool disproportionately,” it added.

Higher margins and its effects
 

The proposed 8 percentage point increase in margins near expiry, analysts highlighted, will reduce leverage for option sellers, impacting profitability. 

While institutional players with high leverage might absorb this change, High net worth individuals (HNIs) and retail individuals with lower leverage may struggle, potentially leading to reduced trading volumes if additional margin resources are unavailable, analysts added.

Strike price rationalisation, collecting premiums upfront, others
 

Other proposed changes, such as rationalising strike prices, collecting premiums upfront, removing calendar spreads, and intraday limit monitoring, analysts believe, are expected to enhance the quality of premiums in the long-term.