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• India's SEBI is implementing stricter rules on derivative trading to curb speculative trading by retail investors.
• The new rules will limit options contract expiries and triple the minimum trading amount, despite pushback from traders and brokers.
• The decision follows a surge in retail investors in India's options market, raising concerns about market stability and investor protection.
• The final rules, to be released this month, are expected to reshape the landscape of derivative trading in India.

In a significant development, India's Securities and Exchange Board (SEBI) is set to implement stricter rules on derivative trading. This move is primarily aimed at curbing speculative trading by retail investors in risky contracts. The decision, which is expected to increase entry barriers and make trading more expensive, is based on the regulator's concern for small investor protection and the need to ensure continued systemic stability.

The new rules, which echo those proposed in July, will limit the number of options contract expiries to one per exchange per week and nearly triple the minimum trading amount. Despite pushback from traders and brokers, who argue that the new rules will hit trading profits and liquidity, SEBI is pressing ahead with the changes, demonstrating its commitment to safeguarding the interests of retail investors.

The decision comes in the wake of a surge in retail investors funnelling savings into India's booming options market. The monthly notional value of derivatives traded reached a staggering 10,923 trillion Indian rupees ($130.13 trillion) in August, the highest globally.

SEBI's Response to Market Concerns

The largest share of trading is in options contracts linked to stock indices like BSE Sensex and NSE Nifty 50. The share of individual investors in index options has risen dramatically, from 2% six years ago to 41% in the financial year ended March 2024. This increase has raised concerns about market stability and investor protection.

SEBI's decision to tighten derivative rules follows an increase in tax on derivative transactions in July, which was intended to reduce the participation of retail investors in the options market. India's finance minister flagged concerns in May that unchecked retail investor trading in derivatives could create future challenges for the markets, investor sentiment, and household finances.

The regulator's July proposals sparked a social media campaign, which resulted in nearly 10,000 comments from traders and other market participants. A large majority of these comments were from traders and brokers who argued that the regulator's new rules would hit trading profits and liquidity.

Final Rules and Market Impact

The final rules will ask exchanges to reduce the number of contract expiries to one a week per exchange from multiple expiries currently that give traders the opportunity to speculate more. SEBI will also raise the minimum trading 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.

In its proposals, the regulator had suggested higher margins for contracts expiring 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 genuine concern, and the regulator would tweak the proposed hike in margins. Exchanges and depositories also raised concerns over intraday monitoring of positions in index derivatives due to a lack of technical capability, and the regulator might not insist on it for now.

The final rules will be released this month through a circular, the sources said. The details have not been reported previously. SEBI did not respond immediately to a request for comment.