The Securities and Exchange Board of India (SEBI) is moving forward with stricter rules for derivative trading to limit retail investors’ exposure to risky contracts, despite resistance from traders and brokers.
According to four sources familiar with the matter, SEBI aims to increase barriers to entry and make it more costly to trade in options.
The regulator plans to reduce the number of options contract expiries to one per exchange per week and nearly triple the minimum trading amount.
These rules, similar to proposals made in July, come after concerns over speculative trading by retail investors in India’s booming derivatives market.
However, SEBI is reconsidering some earlier proposals, such as increasing margin requirements and monitoring intraday trading, based on feedback from market participants.
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Retail Speculation in Options Market Raises Concerns
Authorities are increasingly concerned about the growing participation of retail investors in the options market.
Data shows that in August, the monthly notional value of derivatives traded in India hit ₹10,923 lakh crore ($130 trillion), making it the highest globally.
A large portion of this trading activity is in index options tied to benchmarks like the BSE Sensex and NSE Nifty 50.
The share of individual investors in index options has surged from 2% six years ago to 41% in the financial year ending March 2024, highlighting the rise in retail speculation.
“SEBI wants to curb the rising speculative volumes in index options, especially as they near expiry,” said one source. The regulator is concerned about protecting small investors and ensuring market stability.
New Rules Expected Soon
SEBI is expected to release the final rules this month through an official circular. The proposed changes include raising the minimum trading amount from ₹5 lakh to ₹15-20 lakh ($18,000-$24,000), as mentioned in its July consultation paper.
Additionally, SEBI will ask exchanges to limit contract expiries to one per week per exchange to reduce speculation opportunities.
The regulator had earlier suggested higher margin requirements for same-day expiring contracts, but feedback from exchanges indicated that implementing these changes would be difficult. SEBI is likely to modify this proposal accordingly.
Concerns over the technical capability for intraday monitoring of positions in index derivatives were also raised by exchanges and depositories, and SEBI might not enforce this measure immediately.
Retail Investors Push Back via Social Media
SEBI’s July proposals sparked a strong reaction from traders and brokers, with nearly 10,000 comments submitted in response.
A social media campaign was launched by market participants who argued that the proposed rules would hurt trading profits and market liquidity.
Despite this pushback, SEBI is determined to move forward with the new rules to control excessive retail speculation and safeguard market stability.
Tax on Derivatives and Government Concerns
The upcoming changes follow a tax hike on derivative transactions in July, intended to discourage retail investors from speculative trading.
India’s Finance Minister raised concerns in May that unchecked retail participation in derivatives could pose risks to market stability and household finances in the future.