Brokers push back as Sebi wages war on speculation

Sebi's Crackdown on Derivatives: Brokers Push Back

The Securities and Exchange Board of India (Sebi) is tightening its grip on the derivatives market, spurred by mounting losses among retail investors. This has led to a significant pushback from brokers and market intermediaries, who fear the proposed changes will irreparably harm market liquidity.

Following reports that Sebi might eliminate weekly contract expiries in favor of a bi-weekly system, the Association of National Exchanges Members of India (ANMI) met with Sebi chairman Tuhin Kanta Pandey. Industry representatives vehemently argued against the proposed change, citing potential damage to market liquidity and risk management.

• ANMI's Key Concerns: ANMI also urged Sebi to remove the 2% extreme loss margin on expiry day and reinstate calendar spread benefits, claiming these measures would reduce trading costs and bring Indian markets in line with global standards.

Instead of eliminating weekly expiries, brokers proposed alternative solutions:

• Certification for Weekly Options: Implement a certification process similar to the US Series 7 license, ensuring traders possess the necessary knowledge and risk awareness before accessing weekly options.
• Minimum Capital Requirements: Impose minimum net worth or trading capital requirements for traders participating in weekly options.
• Focus on Liquid Contracts: Permit only weekly options contracts with sufficient open interest and favorable notional-to-premium ratios.

Sebi's Perspective: Sebi whole-time member Ananth Narayan G. highlighted the alarming imbalance between index options turnover and the underlying cash market, with index options turnover often exceeding cash market turnover by a factor of 350 on expiry days. He cited a recent Sebi study revealing that 91% of individual traders ended FY25 with net losses in futures and options, resulting in aggregate losses exceeding ₹1 trillion.

While acknowledging the importance of speculation in price discovery and market depth, Narayan questioned the sustainability of the current high-volume, short-term trading trends.

Concerns about Backlash: Critics, including Kamlesh Shah, managing director at Share India Securities and former ANMI president, warn that banning weekly expiries could backfire, potentially increasing market volatility. Shah advocates for reinstating Bank Nifty as a weekly/fortnightly contract, emphasizing its historical success and its importance for managing market volatility in line with international practices.

The Jane Street Precedent: The recent Sebi order against Jane Street for alleged market manipulation further fueled concerns about increased compliance burdens and market uncertainty, adding complexity to the ongoing debate.

Sebi's Measured Approach: Sebi is monitoring the impact of its recent measures. If trading volumes don't significantly decrease, further proposals will be considered after consultation with stakeholders.

The Ongoing Debate: The debate centers on balancing retail investor protection with maintaining market liquidity and functionality. While Sebi aims to moderate speculative excess, the industry is pushing for solutions that don't stifle legitimate trading activities and inadvertently drive traders to less regulated markets.

Sebi's Long-Term Vision: Sebi officials emphasize that their efforts to improve the quality of the derivatives market are ongoing. They envision a market with longer-term contracts and a focus on sustainable practices.

The future of weekly options in India remains uncertain, but one thing is clear: the debate is far from over.