The new rules directly impact about 35% of futures and options premiums, Jefferies Financial Group Inc analysts said. — Reuters
New Delhi: India’s securities regulator are proposing measures to curb speculation in equity futures and options, a step it says is needed after the explosive growth in derivatives trading in the country.
On Tuesday, the Securities and Exchange Board of India (Sebi) laid out a series of steps including raising the minimum contract size of index derivatives, limiting weekly options to a single benchmark of an exchange, collecting options premium upfront and reducing the number of strike prices.
The surge in India’s equity-derivatives volumes to the highest in the world has sparked repeated warnings from authorities that the frenzy may hinder efforts to channel household savings for productive uses.
The notional turnover in the segment hit US$6 trillion in early February, surpassing the size of the country’s economy.
“Volumes have changed in the last three years – it has multiplied by a factor which was unimaginable before,” Sebi chair Madhabi Puri Buch told reporters Tuesday.
“In the past, we felt there was no need for regulatory intervention because it was a micro issue. But today we feel it has become a macro issue.
“The regulator has injected a sort of warning message here,” said Anand James, chief market strategist at Geojit Financial Services. “They have taken measures aimed at curbing volatility, especially on the expiry days. It needs to be seen whether the rules also lead to a decline in volumes.”
The announcement follows the government’s move in its budget last week to make significant changes to taxes on gains from equity investments and stock derivatives for the first time in decades.
Government officials have regularly highlighted concerns in recent months about increased retail engagement in futures trading, with the Finance Ministry’s economic survey warning that this surge is largely motivated by “humans’ gambling instincts”.
A study released by Sebi last week revealed that seven out of 10 intra-day trades in the cash equity market made losses in the year ended March 2023. These findings are consistent with the regulator’s study last year, which found that nine out of 10 active retail traders lose money on derivatives.
The new rules directly impact about 35% of futures and options premiums, Jefferies Financial Group Inc analysts including Jayant Kharote wrote in a note dated Tuesday.
Add in a reduction to retail participation, these regulations will hit exchanges and retail-focused brokers the hardest, they said.
Still, the stock market has so far taken all the regulatory tweaks and warnings in its stride. Indian equities are set for a ninth straight year of gains, boosted by its tag as the world’s fastest-growing major economy, a gush of local money and strong corporate profit growth. — Bloomberg
