The rupee’s exchange-traded derivatives market saw a turmoil on Wednesday after brokers asked clients to submit proof of underlying exposure on their derivative contracts or unwind their existing positions.

While Reuters reported that brokerages were doing so of their own volition and had not been instructed to do so by the Reserve Bank of India (RBI), the premium on out-of-the-money dollar/rupee put options expiring on April 26 soared up to 250%, despite spot dollar/rupee inching up 0.04% to 83.4200.

Typically, the premium on put options should fall when spot prices rise, unless there is a change in volatility expectations.

Further, the option premium on the 83.25 strike put was higher than on the 83.3750 strike put. A put option allows the buyer to sell dollar/rupee at the strike price on the expiry date. A right to sell at a lower strike price should cost less, Reuters said. Out-of-the-money call options for the April 26 expiry climbed between 100% and 300%.

The stock exchanges have meanwhile sought clarifications from the RBI on its circular in January but have completely stopped new trades without underlying or certificate of having an underlying which needs to be produced when an exchange asks for it.

Zerodha is the latest to join the list of brokers who have asked clients to close out their position. Nithin Kamath, CEO, Zerodha, posted on X: “I have said this before, regulatory risk is by far the biggest risk for stock brokers. The RBI has its own reasons for restricting unhedged currency derivatives, but this means the death of currency derivative trading on stock exchanges by retail traders.”

As per the January 5 RBI circular, a user is allowed to take positions (long or short) without having to establish the existence of underlying exposure, up to a single limit of $100 million equivalent across all currency pairs involving the rupee, put together, and combined across all recognised stock exchanges.

But in the note, the central bank said that recognised stock exchanges shall inform users that while they are not required to establish the existence of underlying exposure, they must ensure the existence of a valid underlying contracted exposure which has not been hedged using any other derivative contract and should be in a position to establish the same if required.

Brokers fear the need to prove underlying exposure would effectively shut out most market participants from trading in the segment as proprietary traders and individual investors, accounting for over three-quarters of the volume, will not be able to meet the underlying exposure requirement.