India's financial regulator, the Securities and Exchange Board of India (SEBI), is preparing to tighten the rules surrounding derivatives trading, aiming to curb speculative activities by retail investors. With derivative trading reaching unprecedented heights, SEBI is set to implement measures that will increase entry barriers and make trading more costly. These changes are in response to concerns over the rapid rise in speculative trading, particularly in options contracts linked to stock indices like the BSE Sensex and NSE Nifty 50.
In August alone, the notional value of derivatives traded in India hit an astonishing INR 10,923 lakh crore, making it the highest globally. The participation of individual investors in index options has surged from just 2% six years ago to 41% by the end of March 2024, raising alarms among regulators.
SEBI’s new rules will limit the number of options contract expiries to just one per exchange each week, reducing opportunities for speculation. Additionally, the minimum trading amount will be nearly tripled, from INR 5 lakh to around INR 15-20 lakh, making it more expensive for retail investors to engage in these trades. These changes are part of SEBI’s broader efforts to protect small investors and ensure systemic stability in the financial markets.
While SEBI is firm on these new restrictions, it is also considering adjustments to some of its earlier proposals. For instance, the regulator had initially suggested higher margin requirements for contracts expiring on the same day, but feedback from stock exchanges and market participants indicated that this could be challenging to implement. As a result, SEBI may revise this proposal to better align with market capabilities.
Another area under review is the intraday monitoring of positions in index derivatives. Concerns were raised by exchanges and depositories about the technical feasibility of this requirement, and SEBI may hold off on enforcing it for now.
These regulatory changes follow a recent increase in taxes on derivative transactions, aimed at discouraging retail participation in the options market. India’s finance minister has also voiced concerns that unchecked growth in retail trading of derivatives could pose risks to market stability, investor sentiment, and household finances.
Despite resistance from traders and brokers, who argue that the new rules will hurt trading profits and liquidity, SEBI remains committed to implementing these measures. The final rules are expected to be announced later this month, marking a significant shift in India’s approach to derivatives trading.
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