India's markets regulator is planning to tighten derivative regulations in an effort to discourage individual investors from speculating on riskier contracts. This move will raise entry barriers and increase trading costs, according to four people with firsthand knowledge of the matter.
According to the sources, the Securities and Exchange Board (Sebi) will implement rules similar to those suggested in July, despite opposition from traders and brokers, restricting the number of options contract expiries to one per exchange each week and virtually tripling the minimum trading value.
However, the sources claimed that Sebi would revisit some of its previous suggestions to tighten margin requirements and track intraday trading positions.
Authorities have been drawing attention to the dangers posed by retail investors' speculative trading, as they are investing their funds in India's rapidly expanding options market.
August saw the biggest monthly notional amount of derivatives traded globally, at Rs 10,923 trillion (USD 130.13 trillion), according to data from the regulator. The bulk of trading activity is in options contracts that are connected to stock indices such as the NSE Nifty 50 and the BSE Sensex.
Relative to six years ago, the percentage of individual investors in index options increased to 41 per cent in the financial year that ended in March 2024, according to regulatory data.
The first of the sources, who all asked not to be named since the judgments are not yet public, stated, "A key objective was to put an end to the large and rising speculative volumes in index options contracts close to expiry."
The source stated, "The regulator believes that this warrants additional measures for both small investor protection and for ensuring continued systemic stability."
The sources stated that a circular with the final rules will be issued this month.
The sanctions come after a tax hike on derivative transactions in July that was aimed at decreasing ordinary investors' involvement in the options market.
In May, India's finance minister expressed worries that future difficulties for the markets, investor confidence, and household budgets could result from an unbridled surge in individual investor trading in derivatives.
Following a social media campaign, the regulator received nearly 10,000 comments on its July proposals from traders and other market participants, the first source said.
The insider continued, there was a social media campaign to overwhelm the regulator with the responses.
According to the four sources, the final regulations will require exchanges to cut back on the number of contract expiries from the several expiries that currently allow traders to speculate more, to only one per week per exchange.
According to the second source, Sebi plans to increase the minimum trading amount from Rs 5,00,000 to Rs 20,00,000 (USD 18,000- USD 24,000), as suggested in the July consultation paper.
Higher margins for contracts expiring on the same day were recommended by the regulator in its proposals, but market participants and the nation's stock exchanges responded that this would be challenging to execute.
According to the sources, the regulator would modify the suggested increase in margins because this was a legitimate issue.
The third source stated that because of a lack of technological capacity, exchanges and depositories have expressed worries with the intraday monitoring of holdings in index derivatives, and the regulator may decide not to require it at this time.
