(Oct 1): India’s securities regulator on Tuesday notified steps to limit a surge in equity derivatives trading in the nation after growing retail participation took the speculative bets to the highest in the world.
The approved measures include limiting of options contracts that expire weekly to one per exchange, upfront collection of options premium from traders, as well as an increase in the minimum contract size to at least 1.5 million rupees (RM74,373), according to a circular published on the Securities and Exchange Board of India’s (Sebi) website.
The circular comes a day after Sebi's board on Monday surprised traders by deferring decision on the changes to its futures and options regulations. Sebi was widely expected to approve measured proposed by it in July during the meeting.
The new rules for index derivatives in India will come into effect in a phase-wise manner from Nov 20, with the last step being implemented from April 1, the circular showed.
Other measures include removal of calendar spread benefit to traders on the day of expiry and an additional extra-ordinary loss margin of 2% on all short options contracts on the day of the expiry, the circular showed.
The tightening align with the regulator’s effort to slow the growth in the derivatives segment, whose turnover has skyrocketed over 40-fold since 2019, reaching a record US$6 trillion (RM24.97 trillion) in February — surpassing the size of India’s economy. The move marks the most sweeping Sebi intervention since the Covid-19 pandemic, when the regulator sought to curb excessive short-selling through derivatives during a market crash.
The limits are aimed at shielding individual traders, as nine out of 10 lost money in the segment in the three-year period ended March, according to Sebi’s latest study. Exchanges and brokers, however, are poised to suffer. Analysts estimated that volumes in equity derivatives would shrink by about one-third.
Profits at global high-frequency trading firms may also come under threat just as they started expanding in the country’s US$5 trillion stock market. Optiver BV, Citadel Securities LLP and Jump Trading LLC are among those that have grown their presence in recent years.
Equity options — highly volatile and risky instruments — have thrived in India because of their low cost and higher leverage. In 2023, investors in the country traded 85 billion options contracts, more than anywhere else in the world. Retail investors now account for more than one-third of the options market, otherwise dominated by high-frequency traders.
India’s derivatives market grabbed global attention in April after US-based Jane Street Group revealed that a strategy used in the country generated US$1 billion in profits in 2023. Algorithms helped foreign investors and proprietary trading desks pocket US$7 billion in gross profits from trading futures and options in the financial year ended in March.
Sebi chairperson Madhabi Puri Buch had described the surge in derivatives trading as a “macro issue” that diverts capital from productive use in the economy. Her warnings — and tax hikes coming into effect next month — have helped bring down the volume of contracts traded from a record US$6 trillion in February.
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