The recent move by the market regulator Securities and Exchange Board of India, has dented trading interests in the derivative segment. The total turnover in equity derivatives declined 22 per cent in December. However, industry watchers believe the change in futures and options (F&O) norms is a “step in the right direction”.

SEBI’s new F&O trading rules, introduced in October last year, although intended to enhance market stability and investor protection, pose challenges, particularly for retail participants, they say.

These changes included a reduction in weekly expiries (restricted to just one index), larger contract sizes, increased margin requirements, upfront collection of premia, removal of calendar spread benefits and more stringent intraday monitoring of position limits. 

Hemant Majethia, CEO & Co-Founder of Ventura Securities, told businessline, “We see the changes in F&O norms as a product suitability initiative by SEBI, aimed at protecting naïve participants, who do not fully comprehend the segment, from getting their fingers burnt.”

• Also read: Equity F&O turnover dips to 13-month low in December

According to a SEBI study, retail traders incurred net losses of a whopping ₹1.81 lakh crore in F&O trades from March 2021 to March 2024.

While these changes might initially discourage retail participation, especially among those relying on short-term speculative trades, “it’s a positive move for the market’s long-term health”, according to Amisha Vora, Chairperson and MD, PL Capital – Prabhudas Lilladher. “Retail investors have the opportunity to shift toward more research-backed, disciplined investing, which ultimately benefits them. Discount brokers, whose business models heavily rely on retail F&O trades, may face challenges, but traditional brokers are better positioned to adapt.”

Educational initiatives

There is also growing demand for educational initiatives from SEBI so that retail investors can learn to use F&O effectively — not just for speculation but also for hedging, arbitrage and similar strategies. “This will empower them with the knowledge to make informed decisions. There should be a stronger focus on educational resources regarding F&O,” said Anand K Rathi, Co-Founder, MIRA Money.

Consequently, he expected more investment in cash markets, potentially stabilising the market and reducing volatility. “While participation in options could increase, the level of derivative transactions we’ve recently observed is likely at its peak for the foreseeable future.”

Total turnover and index options turnover shot up to their peak in June last year to ₹63.2 lakh crore and ₹14.9 lakh crore, respectively.

“The recent increase in the contract value for index derivatives, set at a minimum of ₹15 lakh upon introduction, will necessitate higher capital requirements as customers will be required to allocate larger minimum margins for their trades. This, in turn, may limit overall trading activity and investment choices due to the need for more capital,” Sandeep Bharadwaj, Chief Operating & Digital Officer at HDFC Securities. As expected, total F&O turnover was ₹43.99 crore during December, down 22 per cent over October. Index options premium turnover declined about 30 per cent to ₹9.6 lakh crore during the period.

However, Majethia said that decrease in retail participation may not impact volumes much “as qualified money managers like MFs, AIFs, etc. may increase their participation”.