NSE chief says Sebi proposals to curb F&O volumes to have very significant impact

Sebi's proposals to tighten regulation on the equity index derivatives segment could have a "very significant impact" on exchange volumes if they are implemented in totality, said the chief executive of India's largest stock exchange NSE.

"It's a very important question for the future of at least the profitability of market infrastructure institutions, specifically stock exchanges," said Ashishkumar Chauhan, MD & CEO, National Stock Exchange, during a concall on Thursday, after its June quarter earnings.

"Sebi's purpose of this consultative paper seems to be to bring down the volumes and if the proposals as given in the consultative paper are implemented in their totality there will be a very significant impact on the exchange volumes across India," he said in response to a query on how Securities and Exchange Board of India (Sebi's) proposals could impact volumes.

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In response to another query on substantiating the likely hit on volumes due to increase in lot sizes and having a single expiry per week, Chauhan said, "We are still waiting for the final framework to emerge. After that we will try to decide the sensitivity analysis. But it's anyone's guess."

"You probably are better experts than us because we are only market operators. It's like in a game of cricket (wherein) umpires don't know that much vis-a-vis the players. And so you will have a better understanding of what happens here compared to us."

Concerned by the huge losses faced by retail investors dabbling in index (Nifty and Bank Nifty) options, Sebi sought public comments on seven proposals "to strengthen index derivatives framework for increased investor protection and market stability" on 30 July.

Of these, the proposal to raise the contract lot size value in phases from ₹5-10 lakh presently to ₹15-20 lakh and then up to ₹30 lakh, having only one index expiry per exchange per week in place of a total of five currently and increasing margins around weekly expiry of options from 12.5% to 15% and removal of margin benefit for calendar spread on expiry of weekly options will impact volumes the most.

The first measure will result in upfront margin to trade increasing by three times. Fewer expiries arguably mean lesser volumes. The last measure ensures that since investors use offsetting contracts—sell expiry week and buy next week index options—the upfront margin for clients is cut to 30% of normal margin.

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Sebi's proposals were mooted after its study in January 2023 showed that 9.25 million unique individuals and proprietorship firms made a cumulative loss of ₹51,689 crore in FY24 trading in the index derivatives segment of NSE, the world's largest derivatives exchange by number of contracts traded.

Sebi has sought public comments by 20 August.

The retail frenzy for index options trading took root after the pandemic which confined residents to their homes. The turnover on NSE of index options, which accounts for 98% of total derivatives' notional turnover, jumped from ₹3,445 trillion in FY20 to ₹79,928 trillion in FY24, shows NSE data.

In the June quarter, NSE's consolidated operating revenue grew 51% to ₹4,510 crore while PAT grew 39% to ₹2,567 crore.

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