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India’s securities regulator Tuesday proposed measures to curb speculation in equity futures and options, a step it said is needed after the explosive growth in derivatives trading in the country.
The Securities and Exchange Board of India 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 this frenzy may hinder efforts to channel household savings for productive uses. The notional turnover in this segment hit $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 Chairwoman 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 intraday 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 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 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.
Here are some of the key changes proposed by the regulator:
Increasing contract size:
- SEBI has proposed raising in the contract size for index derivative to 1.5 million rupees to 2 million rupees initially, and then to 2 million rupees to 3 million rupees. Currently, the minimum size is 500,000 rupees to 1 million rupees, which was set more than five years ago.
Weekly index products:
- Weekly options contracts to be provided on single benchmark index of an exchange. India’s stock exchanges currently offer multiple option contracts each week.
Increasing margin near contract expiry:
- Margins on expiry day and the day before expiry shall be increased. At the start of the day before expiry, Extreme Loss Margin, or ELM, will be be increased by 3%, and at the start of expiry day, ELM will be raised increased further by 5%
Market participants and other stakeholders have until Aug. 20 to submit their suggestions on the proposals, according to the statement.
--With assistance from Abhishek Vishnoi.
(Updates with more context after fifth paragraph.)
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