India Regulator Plans Tweaks to Cope with Derivative Trading Risks

India's markets regulator is considering a series of tweaks to its derivative trading rules, according to two sources, as it seeks to address risks arising from explosive growth in options trading.

The new rules could include higher margins for options contracts and more detailed disclosures, and are being considered after a series of meetings with exchanges, brokers and fund houses over the past four months, the sources, with direct knowledge of the matter, said.

Trading in index and stock options has soared in India in the last few years, fueled mainly by retail investors, sparking warnings from market participants and government officials. The notional value of index options traded more than doubled in 2023-24 to $907.09 trillion from the year before.

An unchecked explosion in retail trading of futures and options can create future challenges not just for the markets, but for investor sentiment and household finances, India's federal finance minister warned last month.

One source who is a regulatory official said there was a need for appropriate risk disclosure and steps to prevent excessive speculation or possible manipulation.

The first step the regulator is considering is a linking of options trading with underlying cash volumes in a stock, to contain the build-up of open positions in less liquid stocks, the sources said.

In cases where there is excessive build-up of options positions relative to cash volumes, the margin requirement for trading options would increase, they said.

SEBI will also suggest increasing disclosures on index and stock options contracts, rather than just options activity and open interest as is now done, the sources said.

The regulator is planning to ask exchanges to levy flat fees on brokers regardless of their turnover, the sources said, changing a practise of charging lower transaction fees for brokers with high turnover.

Earlier this month, SEBI suggested tighter rules for individual stock derivatives which, if implemented, would weed out derivatives linked to illiquid stocks.

The proposed changes are in the discussion stage and will be put up for public consultation over the next few months before they are introduced, the sources said.

(Source: Reuters)