SEBI Warns of Losses in Derivative Contracts, Imposes New F&O Rules

Ananth Narayan, a Whole-Time Member of the Securities and Exchange Board of India (SEBI), stated that over 90% of traders in derivative contracts, particularly those trading in index options, were incurring losses. He shared this insight during a panel discussion at the Moneycontrol Global Wealth Summit in Mumbai on March 7.

SEBI’s Caution Over Surge in F&O Volumes

The market regulator, SEBI, has been expressing concerns regarding the surge in Futures & Options (F&O) volumes and has implemented changes in the derivatives segment. A new framework for the index derivatives segment was issued on October 1, which included measures like reducing contracts with weekly expiries, increasing the contract size, and charging additional margins for contracts with zero days to expiry (0DTE). These changes came into effect on November 20, 2024, with their impact being noticed from December.

Narayan mentioned that index options trading volumes saw a 23% year-on-year decline in December, January, and February. Despite this drop, volumes have still risen by 15% compared to two years ago. He emphasized that the decrease in index options activity had not negatively impacted the overall derivatives market, which SEBI considers a positive outcome.

SEBI’s Regulatory Intent and Derivatives Market Size

Narayan stressed that SEBI is closely monitoring incoming data. He highlighted the regulator’s clear intent to ensure that the size of the Indian derivatives market, in relation to its market capitalization, remains aligned with global standards. According to Narayan, a significant portion of investors in F&O (89%) were experiencing losses, with 93% of all trades, mostly in index derivatives, losing money. He pointed out that individuals who suffered losses for two consecutive years continued to trade, and options trading had become a widespread activity. SEBI took action to redirect national resources towards more productive uses.

New Rules for F&O Trading

The updated regulations for F&O trading include raising the minimum contract value for index derivatives to Rs 15 lakh, limiting weekly expiries to one per exchange, and introducing an Extreme Loss Margin (ELM) for short options contracts.

Conclusion

SEBI’s recent regulatory measures reflect a strong commitment to ensuring the stability and integrity of the derivatives market. While the surge in F&O volumes and widespread losses among traders highlighted the need for action, the new rules aim to curb excessive risk-taking and align the market with global standards.

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