The new rules could include higher margins for options contracts and more detailed disclosures, and are being considered after a series of meetings with exchanges, brokers and fund houses over the last four months, sources with direct knowledge of the matter said.
Both sources declined to be identified as they were not authorised to speak to the media.
Trading in index and stock options has surged in India in the past few years, driven largely by retail investors, leading to warnings from market participants and government officials. The projected value of index options in 2023-24 more than doubled to $907.09 trillion from the previous year.
India’s federal finance minister last month warned that uncontrolled growth in retail trading of futures and options could pose future challenges not just for markets, but also for investor sentiment and household finances.
One source, who is a regulatory official, said there was a need for proper risk disclosure and steps to prevent excessive speculation or potential manipulation.
The first step the regulator is considering is to link options trading with the underlying cash volumes of stocks to prevent build-up of open positions in less liquid stocks, sources said.
He added that in cases where options positions become excessively large relative to cash volumes, the margin requirement for options trading would increase.
Options trading volumes in India are around four times the cash trading volumes, while the global average is 5-15 times.
“This ratio has raised concerns,” the second source said.
In the United States, the derivatives-to-cash ratio is about 9 times.
Sebi will also suggest enhancing disclosures on index and stock option contracts, instead of just option activity and open interest, as is done now, sources said.
The regulator plans to ask exchanges to levy a uniform fee on brokers regardless of their turnover, which would change the practice of charging lower transaction fees for brokers with higher turnover, sources said.
Earlier this month, Sebi had suggested stricter regulations for individual stock derivatives, which, if implemented, would eliminate derivatives linked to illiquid stocks.
Sources said the proposed changes are at the discussion stage and will be put up for public consultation in the next few months before being implemented.
An email sent to Sebi seeking comment on Friday has not yet been answered.
Growing speculation
According to data from the Futures Industry Association (FIA), 78% of the 108 billion options contracts traded worldwide in 2023 were on Indian exchanges. Retail investors account for 35% of derivatives trading in the country.
In April, 78% of trades made on the National Stock Exchange, India’s largest bourse, were done by investors with less than Rs 10 lakh ($11,969).
The boom in business has created opportunities for foreign trading firms.
US-based Jane Street and Millennium are currently locked in a legal battle, with Jane Street suing Millennium over its India options strategy. Jane Street has claimed to have generated around $1 billion in revenue from this strategy in 2023.
As of now, Indian exchanges have not introduced options contracts with zero-day expiry, a popular strategy where an options contract is bought on the day it is set to expire, helping traders mimic similar contracts offered in markets such as the United States.
A source familiar with the government’s thinking said that in private conversations officials have expressed their concerns about the rise in zero-day options trading.
The source said this is pure speculation and serves no purpose in the market.
The government has also asked the regulator to consider whether the lot size of options contracts can be increased to prevent very small investors from entering the market, this source said.
An email sent to India’s finance ministry seeking comment on Friday was not answered.
Will Acworth, FIA’s senior vice president of data and research, said options volume growth in India is explosive and far higher than anywhere else in the world.
“The real issue for the government and SEBI is less the risk to the financial system, but more the protection of investors,” Acworth said. He added that buying options without fully understanding the product is akin to gambling.
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