SEBI Reports 35-40% Drop in Derivatives Notional Volumes

In December 2024, the derivatives trading volume experienced a significant 37% month-on-month decline, following a series of measures introduced by the Securities and Exchange Board of India (SEBI) aimed at curbing excessive activity in the derivatives market. This marks a notable shift in the market’s dynamics.

The average daily turnover (ADTV) for the derivatives segment, which represents the notional turnover for the options segment, dropped to ₹280 trillion in December. This is the lowest level recorded since June 2023, compared to ₹442 trillion in November.

Impact of SEBI’s New Rules

December is the first calendar month since SEBI’s new regulations were implemented. These include the introduction of one weekly expiry per exchange and higher extreme loss margins (ELM), both of which have contributed to the decline in trading volumes.

Industry experts predict that trading volumes could continue to decrease further as new measures, including increased contract sizes for weekly derivatives, come into effect on January 1. Additionally, 3 other important regulatory changes will take effect in the coming year, further impacting the market.

Impact on Nifty 50 Weekly Contracts

For the Nifty 50 weekly contracts, the revised contract lot size will take effect on January 2, marking the first weekly expiry under these new terms. This change is expected to contribute to a reduction in trading volumes.

A SEBI official recently reported that the notional volumes for derivatives have already dropped by 35-40%, while premium volumes have decreased by 8%. Despite these reductions, the value per contract has risen by 50%, a trend SEBI finds satisfactory. The regulator has indicated that there are no immediate plans for recalibrating the new measures.

Exchanges have decided to discontinue weekly contracts for Nifty Bank and Bankex. Additionally, a 2% extreme loss margin (ELM) has been applied to short positions on expiry days to mitigate risks associated with increased volatility in the derivatives market.

The SEBI official emphasised that derivatives regulations will be continuously refined to address aggressive speculation, particularly during expiry days. The regulator’s focus remains on investor protection and reducing potential risks to market stability.

Comparison With September’s Record High

The current turnover in the derivatives market has fallen to half of the record ₹537 trillion ADTV achieved in September 2023, a period marked by the Sensex and Nifty hitting all-time highs. Since then, the benchmark indices have fallen by as much as 10% in less than 3 weeks, further dampening trading volumes and contributing to a more cautious trading environment.

Impact of SEBI’s Campaign on Market Participants

Market experts, such as Kranthi Bathini, director of equity strategy at WealthMills Securities, attribute the decline in volumes to SEBI’s regulatory norms, as well as an ongoing awareness campaign about the risks of trading in derivatives. This has made new market participants more cautious, particularly those entering the market for the first time.

SEBI’s regulatory actions on the F&O front followed a study revealing that over 90% of individual traders had been incurring losses during the derivatives market frenzy. Many traders continued participating even after suffering consecutive losses, prompting SEBI’s intervention.

BSE’s managing director and CEO, Sundararaman Ramamurthy, stated that it is too early to assess the full impact of SEBI’s measures on trading volumes and exchange revenues.

SEBI’s new rules will continue to take effect over the next year. Changes such as the upfront collection of premiums and the removal of calendar spread benefits on expiry day will become effective from February 1, 2025. Intraday monitoring of positions will also be introduced starting April 1, 2025.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.