Sebi's Derivatives Strengthening Framework Could Impact Derivatives Trading: MOFSL Report

After the Securities and Exchange Board of India (Sebi) released a consultation paper for strengthening the index derivatives framework to bolster market stability, Brokerage house Motilal Oswal Financial Services Limited said trading volumes would dip hugely.

Motilal Oswal Financial Services Limited in a report released today said that if the measures are replicated in the final regulations, volumes are likely to be hit both for retail participation and for HNIs/High Frequency Traders.

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The negative impact in volume is due to changes such as upfront premium collection, increase in lot size, and additional margin requirements. Sebi proposed raising the minimum trading amount by over three times and increasing margins.

Following Sebi's announcement, Indian brokerage shares observed a decline of 1 to 5 per cent. "The changes will most impact exchanges and retail-focused brokers, with Jefferies predicting the highest impact from reducing weekly option contracts," another report Motilal Oswal Financial Services.

Sebi's Proposal In Derivatives Trading Framework To Increase Market Stability

Sebi has proposed increasing the minimum contract size for index derivatives to up to Rs 30 lakh from Rs 5 to Rs 10 lakh, which will make derivatives trading more expensive and control participation from retail investors. Moreover, Sebi plans to reduce weekly index product offerings and mandate upfront premiums for options trading near expiry seeks to address risk concerns associated with the declining premium near contract expiry. Motilal Oswal Financial Services Limited mentions new proposals to increase the minimum contract size on expected lines.

Additionally, Sebi also plans to rationalize strike prices by introducing them at uniform intervals around the prevailing index value and limiting the number of strikes introduced for an index derivatives contract at the time of launch.

Sebi proposes, that "not more than 50 strikes would be introduced for an index derivatives contract at the time of contract launch."