Sebi’s proposed F&O trading regulations will hit exchanges, brokers: Reports

Sebi said the measures are aimed at enhancing investor protection. (File photo)

4 minutes of reading Last update: August 11, 2024 | 15:05 IST

Stock exchanges and brokers catering to retail investors could be hit hard by regulator SEBI’s proposed measures to regulate futures and options (F&O) trading, which could result in a 30-40 per cent drop in market volumes, reports say.

If these measures are implemented, the number of investors may 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.

In its July consultation paper, Sebi had proposed seven measures, including increasing the minimum contract size and initial collection of option premiums, intraday monitoring of position limits, rationalisation of strike prices, removal of calendar spread on the expiry date and increasing margin just before contract expiry.

Sebi said these measures are aimed at enhancing investor protection and promoting stability in the derivatives market.

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

Of the 7 proposed measures, IIFL Securities believes that the biggest impact will come from the withdrawal of weekly options (only one is allowed per exchange) as index options account for 98 per cent of the volume.

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

Jefferies also believes that the removal of the Bankex weekly contract could impact BSE’s earnings per share (EPS) by 7-9 per cent 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He added that BSE may see a slight decline in profits but if trading activity shifts away from the withdrawn products, it could offset the impact and even lead to an increase in profits.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 per cent of the options volume. This change could reduce the overall trading volumes on the NSE by 30-35 per cent, 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 per cent of its volumes in FY24.

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

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

Jefferies said Sebi’s proposed way of increasing lot sizes by 3-4 times in 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, 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 per cent impact on market volume,” IIFL Securities said.

Sebi chairman Madhabi Puri Buch recently mentioned that households lose 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.

First published: August 11, 2024 | 15:05 IST