Exchanges and brokers focused on retail traders are expected to be most affected by the Securities and Exchange Board of India’s (SEBI) proposed changes to Futures & Options (F&O) trading rules, according to equity analysts Jayant Kharote and Prakhar Sharma at Jefferies.
Key Amendments and Their Implications
SEBI announced seven key amendments to the derivatives trading framework on Tuesday, aimed at bolstering investor protection and market stability. Analysts believe that clearing members like Nuvama, which cater to institutional players such as high-frequency trading (HFT) firms and foreign portfolio investors (FPIs), might experience minimal direct impact.
However, there could be secondary effects, such as the removal of the Bankex weekly contract on the BSE, which could reduce earnings per share (EPS) by 7-9% over FY25-27.
Scenario Analysis by Jefferies
Jefferies noted that gains from the spillover of trading activity from discontinued products could offset the EPS impact. In the event of a moderate industry-wide impact from Sebi’s measures, there could even be EPS upgrades.
Discount brokers like Zerodha, Angel One, and Paytm Money are expected to face a high impact from the tightening of the F&O market and recent changes to transaction charges. Traditional brokers, including MOFSL, IIFL Securities, and ICICI Securities, will likely see a high impact from the F&O market tightening but a low impact from the new transaction charge orders.
Reduction in Weekly Option Contracts
One of the most significant changes is the reduction of weekly option contracts to one benchmark index per exchange, resulting in six weekly contracts per month, down from 18. Monthly contracts, which occur in the fourth week of the month, will remain unchanged.
Weekly premiums currently account for about 65% of the industry’s total premiums, and this reduction could eliminate approximately 35% of these premiums. However, if trading activity shifts to the remaining products, the overall market impact could be contained to 20-25%.
Increased Lot Sizes to Impact Retail Participation
Sebi’s proposal to increase lot sizes by 3-4 times over the next six months is likely to reduce retail participation due to higher ticket sizes, especially on expiry days. Jefferies highlighted that while small retail traders (less than Rs 10 lakh monthly premiums) constitute less than 3% of system premiums, their reduced participation could have a magnified impact as they may contribute disproportionately to the profit pool.
Higher Margins and Their Effects
The proposed 8 percentage point increase in margins near expiry will reduce leverage for option sellers, impacting profitability. Institutional players with high leverage might absorb this change, but high net worth individuals (HNIs) and retail traders with lower leverage could struggle, potentially leading to reduced trading volumes if additional margin resources are unavailable.
What Are The Other Proposed Changes
Other proposed changes include rationalising strike prices, collecting premiums upfront, removing calendar spreads, and intraday limit monitoring. Analysts believe these measures are expected to enhance the quality of premiums in the long term.