The Securities and Exchange Board of India (Sebi) Tuesday increased the minimum contract size in index derivatives to ₹15 lakh from the current ₹5 lakh, making options trading costlier. At the same time, it reduced weekly index product offerings to just one per exchange, seeking to curb frenzied speculation among retail traders.
“Given the inherent leverage and higher risk in derivatives, this recalibration in minimum contract size, in tune with the growth of the market, would ensure that an inbuilt suitability and appropriateness criteria for participants is maintained as intended,” Sebi said in a circular.
‘Will Impact Exchanges’ Revenues’
A study by the regulator had shown that 11 million traders in the derivatives segment made a combined loss of Rs 1.81 lakh crore over the past three years, with just over 7% of the traders in the segment making money. Several market commentators have expressed concerns over the retail frenzy, arguing in favour of measures that would curb speculative trading in the segment. Sebi has increased the minimum contract size for index derivatives such as Nifty and Sensex to Rs 15 lakh from the existing range of Rs 5-10 lakh. The current minimum contract size of Rs 5 lakh to Rs 10 lakh was last set in 2015. Henceforth, this range will be Rs 15 lakh to Rs 20 lakh.
During the past nine years, the benchmark indices have gone up nearly three times. “Both exchanges will see less trade volumes due to these changes, and we expect a 10-15% volume dry-down from November. This will also impact their revenues,” said Rajesh Palviya, head of technical and derivatives research, Axis Securities.
Discount Brokers
Discount brokers that have harnessed high volumes and trading frequency “will also take a hit to their volumes and revenues, as the cost benefit provided to high frequency traders, scalpers or algo traders will now no longer be available,” said Palviya.
This measure would be effective for all new index derivatives contracts introduced after November 20, 2024.
India’s derivatives market turnover has significantly surpassed that of the cash market. India accounts for 30-50% of global exchange-traded derivative trades, Sebi had said in a discussion paper in July.
While cash market annual turnover increased by just over two times between FY20 and FY24, index options annual turnover on a premium basis has risen by over 12 times – from Rs 11 lakh crore in FY20, to Rs 138 lakh crore in FY24.
The regulator said each exchange will be allowed to provide derivatives contracts for only one of its benchmark indices with weekly expiry.
At present, there are weekly derivative contracts for benchmark indices and the Bank index. With the launch of weekly derivatives contracts on the benchmark index by NSE in February 2019, there has been a shift in trading activity toward index options contracts.
“This will result in reduced volumes for exchanges. Impact on BSE will be more than that on NSE as BSE caters to two expiry days/week while NSE caters to three expiry days/week,” said Abhilash Pagaria, head of Alternative & Quantitative Research, Nuvama Wealth.
“This gives BSE a shot at having 50% market share in weekly options contract volumes. We are building in 30% decline in overall option volumes, which we believe will be more than sufficient to cover the impact of this regulation,” Pagaria said.