India’s financial markets are poised for a transformative shift as the Securities and Exchange Board of India (Sebi) strengthens its hold on product trading.
In an assertive bid to bolster entry barriers and hike trading costs, Sebi aims to temper the unrestrained enthusiasm of retail investors diving into high-risk contracts. This bold strategy, revealed by insiders privy to the unfolding plans, marks the dawn of a sweeping overhaul in the trading arena.
Sebi’s upcoming reforms are not minor tweaks, they are a seismic shake-up. One of the most striking changes on the horizon is the drastic reduction of options contract expiries to a solitary weekly occurrence per exchange, a sharp departure from the current array of expirations available.
Also, the regulator is contemplating a hefty increase in the minimum trading threshold, actually tripling it, despite a chorus of resistance from the trading community that has echoed through the feedback channels since July.
However, stories from those close to the matter suggest Sebi might ease some of its tougher views, such as scaling back proposed margin hikes and dialling down scrutiny on intraday trading, hinting at a more balanced approach.
This regulatory recalibration emerges amidst growing concern over a surge of theoretical trading by retail investors, who are channelling their savings into India’s booming options market at an exceptional rate.
In August alone, the notional value of derivatives traded each month soared to an eye-watering Rs 10,923 trillion, catapulting India to the peak of global derivatives trading, as highlighted by Sebi’s data. A substantial portion of this trading frenzy is anchored in options tied to major stock indices, like the BSE Sensex and NSE Nifty 50.
According to regulatory figures, retail participation in index options has ballooned dramatically, from a mere 2% six years ago to a staggering 41% by March 2024. The relentless surge in speculative volumes, particularly in near-expiry index options contracts, has set off alarm bells within Sebi.
“The primary goal here is to curb the rampant surge in speculative trading volumes,” noted one insider, speaking on condition of anonymity due to the confidentiality of the discussions.
“There’s an urgent necessity for robust protections to shield small investors and maintain systemic stability,” the source elaborated. Sebi is expected to lay out this regulatory framework in a formal circular later this month, as confirmed by those familiar with the process.
Sebi has kept a conspicuous silence as these developments simmer behind closed doors, opting not to comment publicly on the regulatory clampdown. This move dovetails with recent tax hikes on derivative transactions introduced in July, a clear signal from authorities seeking to cool retail fervour in the options market.
The urgency of such interventions was underscored in May when India’s finance minister warned against an unchecked retail trading frenzy in derivatives, spotlighting potential threats to market stability, investor confidence, and household financial health.
Sebi’s proposals have sparked a storm of opposition, with the regulator receiving nearly 10,000 comments in response to its July consultation paper. This backlash, fueled by traders’ and brokers’ coordinated social media campaigns, argues that the new rules could choke trading profits and drain market liquidity.
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“A concerted effort was launched on social media to flood the regulator with feedback,” remarked another insider. In response, Sebi is poised to proceed with pivotal measures, such as reducing contract expiries to a singular weekly occurrence per exchange, a tactic designed to trim speculative opportunities, according to those familiar with the discussions.
Moreover, Sebi plans to significantly hike the minimum trading amount, targeting a range of Rs 15 lakh to Rs 20 lakh (roughly $18,000-$24,000), up from the current threshold of Rs 500,000, as outlined in its July proposal.
However, the regulator seems to be reassessing some of its initial ideas, such as the impractical suggestion of imposing steeper margins on contracts expiring the same day, a proposal met with widespread criticism.
Yet another source in the loop hinted that technical hurdles flagged by exchanges and depositories, particularly around monitoring intraday positions in index derivatives, might prompt Sebi to temporarily soften its stance on these requirements.
As the financial community braces itself for Sebi’s impending regulatory wave, anticipation mounts around the specifics of the forthcoming circular that will spell out the final reforms.
The countdown to a more regulated and potentially more resilient options market is well underway, heralding a new chapter in India’s financial saga. This chapter promises to reshape the contours of trading as we know it.
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