Sebi to tighten derivatives rules despite investor backlash: report

MUMBAI – India’s markets regulator to tighten rules derived rules to raise barriers to entry and make trading more expensive in a bid to limit retail investor speculation on risky contracts, four sources with direct knowledge of the matter said.

Securities and Exchange Board of India (SEBI) will limit the number of options contract expirations to one per exchange per week and nearly triple the minimum trading amount, the sources said, in rules similar to those proposed in July, despite pushback from traders and brokers.

But SEBI will review some of its earlier proposals to increase margin requirements and monitor intraday trading positions, according to sources.

Authorities have been warning of risks arising from speculative trading by retail investors, who have been channelling savings into India’s booming options market.

The monthly notional value of derivatives traded was 10.923 trillion Indian rupees ($130.13 trillion) in August, the highest globally, regulator data showed. Most of the trading is in options contracts linked to stock indexes such as the BSE Sensex and NSE Nifty 50. The share of individual investors in index options has risen to 41% in the fiscal year ended March 2024 from 2% six years earlier, regulatory data showed. “A key objective was to put an end to large and growing speculative volumes in index options contracts nearing expiry,” said the first of the sources, who declined to be identified as the decisions are not yet public. “The regulator believes this warrants additional measures both for the protection of small investors and to ensure continued systemic stability,” the source added.

The final rules will be published this month through a circular, the sources said.

Details have not been previously reported. SEBI did not immediately respond to a request for comment.

The measures follow an increase in the tax on derivatives transactions in July aimed at reducing the participation of retail investors in the options market.

India’s finance minister in May expressed concern that any uncontrolled explosion of derivatives trading by retail investors could create future challenges for markets, investor sentiment and household finances.

SOCIAL MEDIA CAMPAIGN
The regulator received nearly 10,000 comments on its July proposals from traders and other market participants following a social media campaign, the first source said, adding that a large majority of them were from traders and brokers who argued the regulator’s new rules would hurt trading profits and liquidity.

“There was a social media campaign to overwhelm the regulator with responses,” the source added.

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The final rules will require exchanges to reduce the number of contract expirations to one per week per exchange, compared with the current multiple expirations that give traders the opportunity to speculate more, the four sources said.

SEBI will also increase the minimum trade amount to nearly Rs 1.5 crore to Rs 2 crore ($18,000-$24,000) as proposed in the July consultation paper from Rs 500,000, the second source said.

In its proposals, the regulator had suggested higher margins for same-day expiring contracts, but feedback from the country’s stock exchanges and market participants said this would be difficult to implement.

This was a genuine concern and the regulator would adjust the proposed increase in margins, the sources said.

Exchanges and depositories also expressed concerns about intraday monitoring of index derivatives positions due to lack of technical capability and the regulator may not insist on it for now, the third source said.