SEBI has proposed F&O norms that will hit stock exchanges and brokers, reports say

Warehouse exchange AND brokersserving retail traders, could be hit hard by the regulator SEBIproposed measures for futures and options (F&O) Trade regulationswith market volumes down 30-40%, according to reports. If these measures are implemented, the number of investors could decrease, it added.

In addition, discount brokers, which are largely dependent on retail investors, are expected to feel the effects of these changes more than traditional full-service brokers.

SEBI in its July consultation paper had suggested seven measures, including increasing the minimum contract size and initial collection of option premiums, intra-day monitoring of position limits, rationalisation of strike prices, removal of calendar spread on the expiry date and increasing margin just before the expiry of the contract.

SEBI said these measures are aimed at improving investor protection and promoting market stability on derivatives markets.

According to a Jefferies report, SEBI’s proposed measures to reduce the number of weekly options contracts from 18 to 6 could impact around 35% of industry premiums. However, if trading spills over to the remaining contracts, the overall impact could be reduced to 20-25%.

Of the 7 proposed measures, IIFL Securities believes that the withdrawal will have the biggest impact weekly options (only 1 per exchange is allowed) as index options make up 98% of the volume.

IIFL Securities expects the National Stock Exchange (NSE) to be hit harder than the BSE as 60% of NSE’s revenue comes from options trading, compared to 40% for the BSE. It estimates that by FY26, NSE’s profits could be reduced by 25-30%, while BSE’s profits could fall by 15-18%.

Jefferies also believes that the removal of the Bankex weekly contract could impact BSE’s earnings per share (EPS) by 7-9% in fiscal 2025-2027.

He added that BSE may see a slight decline in profits but if trading activity shifts away from the withdrawn products, it could offset the impact and even lead to an increase in profits.

“We do not see any impact of these regulations on MCX. Within the value chain, discount brokers are likely to be more impacted than traditional full-service brokers, given the former’s dependence on retail investors,” IIFL Securities said.

Jefferies believes clearinghouse members such as Nuvama, which serves institutional traders, high-frequency traders (HFTs) and foreign portfolio investors (FPIs), will be less affected.

The rationalisation of weekly options to just one benchmark index per exchange will significantly impact the NSE as it currently has four weekly index expirations with Bank Nifty being the most important contributing to 50% of options volumes. This change could reduce the overall trading volumes on the NSE by 30-35%, IIFL Securities said. On the other hand, the BSE is expected to be less affected as it has only two contracts and Sensex accounts for 85% of its volumes in FY24.

Even if Bankex has a 30% share by fiscal year 2026, its impact on BSE volumes is likely to be smaller compared to NSE, the release said.

Further, with just two contract expirations, BSE may gain market share and witness higher trading volumes, which may result in an estimated 20 per cent reduction in overall volumes, it added.

Jefferies said SEBI’s proposed measure of increasing lot sizes by 3-4 times over six months could lead to higher costs for retail investors, potentially limiting their market participation.

The proposed increase in margin for option sellers close to expiry could reduce leverage and profitability, especially for retail traders with limited funds. “Finally, other measures like increasing ELM (extreme loss margin) around expiry and withdrawal of calendar spread margin at expiry will increase margin requirements and thus could impact liquidity. Based on our initial estimates, we expect a 30-40% impact on market volume,” IIFL Securities said.

SEBI chief Madhabi Puri Buch recently mentioned that households lose up to Rs 60,000 crore annually in the troubled futures and options segment.

Earlier SEBI studies have shown that retail investors lose money in nine out of 10 trades in the F&O segment. Last month, the government in the Union Budget had increased the Securities Transaction Tax (STT) on futures and options from October 1 to allay concerns about excessive interest in the derivatives segment.

Earlier, the Economic Survey had flagged concerns about the growing interest of retail investors in derivatives trading. The survey found that speculative trading was not taking place in the developing country.

It was also highlighted that the sharp increase in retail investor participation in F&O trading is likely due to people’s propensity towards gambling.