SEBI Proposed Changes To Derivative Trading Rules

In response to the explosive growth in options trading, India's markets regulator, the Securities and Exchange Board of India (SEBI), is considering a series of significant tweaks to its derivative trading rules. These proposed changes aim to address the potential risks arising from this rapid expansion, particularly among retail investors. The new rules could include higher margins for options contracts and more detailed disclosures, reflecting SEBI's commitment to ensuring market stability and investor protection.

Surge in Options Trading

Trading in index and stock options has seen unprecedented growth in India over the past few years. This surge has been largely driven by retail investors, resulting in the notional value of index options more than doubling in 2023-24 to an astounding $907.09 trillion. Such rapid expansion has raised alarms among market participants and government officials alike. India's federal finance minister recently warned that unchecked growth in retail trading of futures and options could pose significant challenges not only for the markets but also for investor sentiment and household finances.

Proposed Regulatory Changes

SEBI's proposed regulatory changes are being developed after a series of meetings with exchanges, brokers, and fund houses over the past four months. The first major step under consideration is linking options trading with the underlying cash volumes of a stock. This measure aims to control the build-up of open positions in less liquid stocks. If there is an excessive build-up of options positions relative to cash volumes, the margin requirement for trading options would increase.

Additionally, SEBI is looking to increase disclosures on index and stock options contracts. Currently, only options activity and open interest are disclosed. The new rules would require more comprehensive disclosures to provide a clearer picture of the risks involved.

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