Mint Primer: A new era awaits India’s F&O market in 2025

What measures has Sebi introduced?

Sebi introduced a set of six new measures on 1 October to skim the froth in the domestic derivatives market. Measures like doubling and trebling of index contract sizes to ₹15-20 lakh, an additional 200-basis-point extreme loss margin of 14% for selling contracts on their expiry days and only allowing weekly expiries for Nifty 50 and Sensex contracts came into effect from 20 November. These new rules will raise the entry barriers and limit trading opportunities for retail players who often lack a sound understanding of futures and options (F&Os), along with the technological sophistication to execute successful trades.

Which curbs come into effect in 2025?

Measures including mandatory upfront collection of option premiums by brokerages and the removal of calendar spread benefit on expiry days will kick in from 1 February 2025. The removal of spread essentially means more margin requirements for selling options on expiry days despite the presence of hedged positions. Once in effect, the measures will limit over-leveraged positions, while raising the stakes for all participants. This is part of a broader attempt to stop institutional players and brokerages from taking part in and encouraging excessively risky bets.

How do the new measures impact retail investors?

Retail investors looking to earn a quick buck will now have more skin in the F&O game, if at all they find the means and courage to trade minimum contract sizes worth ₹15-20 lakh. Higher capital requirement and hedging costs, and lower trading opportunities are warnings that “options cannot be a national pastime”, as put forth by Sebi member Ashwani Bhatia.

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What about the impact on brokerages?

Experts say the measures will hit the earnings of discount brokers like Zerodha, Groww and Angel One as they earned significant revenue from F&O trading. Since they operate on a per order or per lot pricing model, an increase in lot sizes will discourage retail participation and reduce volumes. Combined with the elimination of volume-based discounts they got from exchanges, the brokers might have to increase fees or diversify into other products to maintain profitability. The curbs will likely reduce Sebi’s turnover-fee income.

What does it mean for derivatives market?

India is the world’s largest derivatives market, with 80% of global index options being traded in the NSE, according to Bloomberg data. Since Sebi is uneasy wearing this crown, “we expect an overall 35-40% drop in order volume and 10-15% drop in premium turnover once the remaining measures come into effect next year”, said Ashish Nanda, president, digital business, Kotak Securities. The measures will ensure sustainable growth for the domestic derivatives market from 2025 onward, Nanda added.