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Informist, Wednesday, Jul 31, 2024

 

By Rajesh Gajra

 

MUMBAI – The proposals of the Securities and Exchange Board of India to curb options trading in index derivatives contracts have evoked a mixed reaction from market participants. Many believe that if they are implemented as a whole, the volume in options trading, which is concentrated to a great extent on the day of expiry, will drop.

 

The proposals to collect the premium upfront and increase lot size are likely to hit the participation of retail investors. The removal of the calendar spread benefit and imposition of additional margin for expiry measures will hit high-frequency, high-net-worth traders, Motilal Oswal Financial Services said in a note today. If participation by retail and high-net-worth traders is hit, it would mean a blow to trading volumes.

 

"If all the seven proposals of SEBI are implemented as suggested in parallel, it could result in significant erosion of volumes from derivatives," said B.K. Sabharwal, head of the capital market and commodity market committee at PHD Chamber of Commerce and Industry. Sabharwal said such measures were undertaken in South Korea in 2014 because of similar concerns. "The market there never recovered despite many attempts by regulators to revive business activity, and even 10 years later the volumes are lower than in 2014," he said.

 

Some other market participants do not, however, expect the options trading volume to be hit meaningfully. The proposal to increase lot size to around 2 mln rupees may be counterproductive as it will push existing retail traders in futures contracts to options trading as premium-based margins in options are considerably lower than the margins on futures notional value, Nilesh Sharma, president and executive director of SAMCO Securities, told Informist.

 

The SEBI paper has proposed that the current range of minimum contract lot value of 0.5-1 mln rupees be raised significantly to 2-3 mln rupees in two phases. Nithin Kamath, founder and chief executive officer of Zerodha Broking, said in a post on microblogging site X on Tuesday that the SEBI proposals "won't really change" options volume but will reduce that in futures. "Options come with almost unlimited leverage, whereas leverage on futures is capped at 6 times (15% for index)... (so) whether it is an STT (securities transaction tax) increase in budget or contract size going up to Rs 20 lakhs (2 mln rupees), these changes will incentivize futures traders to move to options," Kamath said.

 

There is also uncertainty about the impact of SEBI's proposal to restrict an exchange to offering weekly options on only one benchmark index. This is expected to affect volumes because weekly expiries have been driving the equities derivatives segment's recent exponential volume growth, Amit Goel, co-founder and chief global strategist at Pace 360, told Informist.

 

SAMCO's Sharma said traders go by what products are available and if there are only two weekly expiries instead of five, it may lead to more overnight open positions being taken. He was referring to the potential for risks getting transformed from daily to overnight instead of getting mitigated.

 

SEBI stated in its paper that due to weekly options expiry taking place in one index or the other on the National Stock Exchange and BSE, there was large open interest, and hyperactive and abnormal trading close to the day of expiry. This, according to the market regulator, poses the risk of destabilising the market in case there is a black swan event.

 

The SEBI paper has also proposed cutting the number of strike prices to 50 at most at the time of launch and restricting introduction of strike prices beyond 4% of the prevailing index level. "By concentrating trading volumes on fewer strike prices, liquidity at these levels is likely to be maintained or even improved, which will lower the impact cost for large traders," Feroze Azeez, deputy chief executive officer of Anand Rathi Wealth, said in a note today.  End

 

Edited by Rajeev Pai

 

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