Sebi proposes seven key changes to curb derivatives trading framework

Fewer options strike prices, reducing weekly expiries among steps proposed

The Securities and Exchange Board of India (Sebi) on Tuesday proposed seven key amendments to the derivatives trading framework, aiming to bolster investor protection and market stability.

Based on an expert working group recommendations, the markets regulator has proposed fewer options strike prices, upfront collection of options premium, at least trebeling minimum contract sizes, and reducing weekly expiries.

These long-anticipated recommendations come amid mounting concerns from financial regulators and economists regarding the exponential growth of the derivatives market, where daily turnover frequently surpasses Rs 400 trillion, and substantial losses for small investors.

“If there is an annual loss of Rs 50,000-60,000 crore of household savings through derivatives, it is a macro concern. This (money) could potentially get deployed more productively in the next IPO round, mutual funds, or productive use for the economy,” said Sebi Chairperson Madhabi Puri Buch, at a National Stock Exchange (NSE) event ahead of the release of the consultation paper.

 

Should Sebi’s proposals be enacted, both NSE and BSE may experience reduced trading volumes, potentially affecting their profitability. Asked about the potential impact on profitability, Ashishkumar Chauhan, managing director and CEO of NSE, the country’s largest exchange, emphasised that bourses serve as first-level regulators before acting as profit-driven enterprises. Chauhan affirmed that the NSE would adhere to Sebi’s guidelines on derivatives upon their finalisation.

Under Sebi’s proposal, exchanges would be required to reduce their offerings in the options segment, limiting to a single benchmark for weekly expiry. Currently, each day of the week represents a weekly expiry for an index, fostering speculative trading that accounts for the bulk of the notional turnover getting generated on the expiry day.

Additionally, the regulator plans to increase the minimum contract size from the current Rs 5 lakh to Rs 15 lakh-Rs 20 lakh. Other key proposals include the upfront collection of options premiums from buyers, increased contract margins near expiry, intraday monitoring of position limits, rationalisation of contract strikes, and the removal of calendar spread benefits on expiry day.

According to Sebi, the cumulative trading loss incurred by 9.25 million unique individuals and proprietorship firms engaged in index derivatives trading on the NSE amounted to Rs 51,689 crore in FY24. It also highlighted that nearly 28 per cent of the notional turnover on Nifty weekly expiry occurs in the final hour, with the figure rising to 40 per cent for the Sensex.

“Bursts of speculative hyperactivity in derivative markets, particularly by individual players, can detract from sustained capital formation by endangering both investor protection and market stability,” noted Sebi in the consultation paper.

Industry estimates indicate that over 80 per cent of the fee revenue collected by the NSE originates from options trading. Beyond the exchanges, these new proposals are expected to impact brokers, who are already navigating a slew of regulatory changes.

Course correction

Some of the key measures suggested by Sebi in the consultation paper
 

 Raising entry barrier by 3x-4x increase in minimum contract size to Rs 15-20 lakh

 Weekly options contract to be limited to one index per exchange

 Upfront collection of option premium from buyers

 Margins to be increased on expiry day and the day before

 Options strike to be rationalised, to be uniform until a threshold

 Exchanges to monitor position limits