Exclusive-India to tighten rules on derivatives despite investor pushback, Reuters sources say

By Jayshree P Upadhyay and Ira Dugal

MUMBAI (Reuters) – India’s markets regulator will tighten derivatives rules to raise barriers to entry and make trading more expensive as it seeks to curb retail investors speculating on risky contracts, four sources with direct knowledge of the matter said. this sense.

The Securities and Exchange Board of India (SEBI) will limit the number of options contract expirations to one per exchange per week and nearly triple the minimum trading amount, the sources said, under rules similar to those proposed in July, despite pushback from traders and brokers. .

But SEBI will revise some of its earlier proposals to increase margin requirements and monitor intraday trading positions, sources said.

Authorities have flagged risks from speculative trading by retail investors, which have funneled savings into India’s booming options market.

The monthly notional value of derivatives traded was 10,923 trillion Indian rupees ($130.13 trillion) in August – the highest globally, data from the regulator showed. Most of the trading is in options contracts linked to stock indices as well as the NSE Nifty 50.

Individual investors’ share of index options rose to 41 percent in the financial year ending March 2024, from 2 percent six years earlier, regulatory data showed.

“A key objective was to end large and growing speculative volumes in index options contracts close to expiration,” said the first of the sources, who declined to be identified because the decisions are not yet public.

“The regulator believes this warrants additional measures both to protect small investors and to ensure continued systemic stability,” the source added.

The final rules will be published this month through a circular, the sources said.

The details have not been previously reported. SEBI did not immediately respond to a request for comment.

The moves follow an increase in the derivatives trading tax in July, aimed at reducing the participation of retail investors in the options market.

India’s finance minister signaled concern in May that any uncontrolled burst of derivatives trading by retail investors could create future challenges for markets, investor sentiment and household finances.

SOCIAL MEDIA CAMPAIGN

The regulator received nearly 10,000 comments on its July proposals from traders and other market participants after a social media campaign, the first source said, adding that the vast majority came from traders and brokers who have claimed the regulator’s new rules would hurt trading profits and liquidity. .

“There has been a social media campaign to overwhelm regulators with responses,” the source added.

The final rules will require exchanges to reduce the number of contract expirations to one per week per exchange from multiple expirations currently, which gives traders the opportunity to speculate more, the four sources said.

SEBI will also raise the minimum trade amount to nearly 1.5 million rupees to 2 million rupees ($18,000-24,000), as proposed in the July consultation paper, from 500,000 rupees, it said the second of the sources.

In its proposals, the regulator suggested higher margins for contracts that expire on the same day, but feedback from the country’s stock exchanges and market participants said this would be difficult to implement.

This was a real concern and the regulator would modify the proposed hike in margins, the sources said.

Exchanges and custodians have also raised concerns about intraday monitoring of positions in index derivatives because of a lack of technical capacity, and the regulator may not push for that, the third said between sources.

($1 = 83.9370 INR)