The Securities and Exchange Board of India (SEBI) has recently proposed a series of regulatory changes aimed at tightening the equity index derivatives market. According to Ashishkumar Chauhan, Managing Director and CEO of the National Stock Exchange (NSE), these proposals could have a profound impact on trading volumes across India’s stock exchanges if implemented in full.
Speaking during a conference call following NSE’s June quarter earnings, Chauhan emphasized the significance of these potential regulations, noting that they could drastically affect the profitability of market infrastructure institutions, particularly stock exchanges. “SEBI’s consultative paper seems to aim at reducing trading volumes, and if the proposals are implemented as outlined, the impact on exchange volumes could be very significant,” Chauhan stated.
One of the key areas of concern is the potential increase in contract lot sizes and the reduction in the number of weekly expiries for index derivatives. Currently, traders can choose from five weekly expiries, but SEBI’s proposal would limit this to just one per week. Additionally, the proposed increase in the contract lot size value from the current INR 5-10 lakh to INR 15-20 lakh, and eventually up to INR 30 lakh, could further dampen trading activity.
These measures are part of SEBI’s broader effort to enhance investor protection and market stability. The regulatory body is particularly concerned about the substantial losses sustained by retail investors in the index derivatives market. A recent study by SEBI revealed that 9.25 million unique individuals and proprietorship firms suffered a collective loss of INR 51,689 crore in FY24 trading in NSE’s index derivatives segment, the world’s largest by contract volume.
The proposed changes would also increase the upfront margin required for trading, potentially tripling the current requirements. Furthermore, SEBI plans to raise the margin requirement around weekly expiries from 12.5% to 15% and eliminate the margin benefit for calendar spread options on expiry, which could further reduce trading volumes.
While the final framework has yet to be determined, Chauhan acknowledged that the potential impact is uncertain and highly speculative at this stage. “We are still awaiting the final regulations to be released, and only then can we conduct a thorough sensitivity analysis,” he explained. Drawing an analogy, he likened the situation to a cricket match where “umpires don’t know as much as the players,” suggesting that market participants may have a better grasp of the likely outcomes.
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