SEBI to Tighten Derivative Trading Rules

By Jayshree P Upadhyay and Ira Dugal

MUMBAI (Reuters) – India’s markets regulator, SEBI, is set to tighten derivative rules to raise entry barriers and increase costs for traders. This move aims to limit retail investors’ speculation on risky contracts, as reported by four credible sources.

Rule Changes

• SEBI plans to limit options contract expiries to one per exchange each week.
• The minimum trading amount will nearly triple.

These adjustments are in line with proposals made in July, despite significant pushback from traders and brokers.

SEBI will revisit earlier proposals to enhance margin requirements and to oversee intraday trading positions.

Concerns Over Speculation

Authorities have raised alarms about the risks posed by speculative trading from retail investors, who are investing heavily in India’s expanding options market. In August, the notional value of derivatives traded reached 10,923 trillion rupees ($130.13 trillion), marking the highest figure globally.

The share of individual investors in index options surged to 41% in the financial year ending March 2024, up from just 2% six years prior.

Regulator’s Objectives

A key goal is to reduce the soaring speculative volumes in index options contracts nearing expiry. The regulator aims to protect small investors and maintain systemic stability.

The final version of the new rules is expected to be published this month.

Market Response

SEBI received nearly 10,000 comments regarding its July proposals, largely from traders who believe the new rules will negatively impact trading profits and liquidity. A social media campaign by traders aimed to flood the regulator with responses.

Final adjustments will limit contract expiries to one per week per exchange. The minimum trading amount will rise to approximately 1.5-2 million rupees ($18,000-$24,000) from 500,000 rupees.

Although SEBI intended to raise margins for same-day contracts, feedback indicated implementation challenges.

Recent concerns were also voiced regarding intraday position monitoring for index derivatives due to inadequate technical capabilities.

($1 = 83.9370 Indian rupees)