In a recent report, Jefferies analyzed the Securities and Exchange Board of India’s (SEBI) measures aimed at driving a calibrated tightening of the Futures and Options (F&O) market. The report noted that SEBI’s circular aligns broadly with its earlier discussion paper and will impact approximately 35% of industry premiums.
Phased Implementation and Key Deviations
The phased implementation is expected to occur over the next 3 to 6 months. Key deviations from earlier proposals include a reduction in the hike to expiry day margins, set at 2% compared to the previously suggested 8%. Additionally, the lot size increase will be between 2 to 3 times, down from the initial proposal of 3 to 4 times.
Participant Behavior Post-Implementation
Attention now shifts to how market participants will behave following the implementation of these measures, set to begin on November 20.
Discount brokers are expected to be the most affected, with exchanges like the BSE also facing significant impacts.
Lot Size and Margin Hike Analysis
SEBI’s proposed single-phase increase in lot size by 2-3 times contrasts with the higher 3-4 times increase suggested in the discussion paper. Furthermore, the proposed additional margin for option sellers on expiry day is 2%, down from the earlier suggestion of 8%, and no extra margin has been introduced on T-1 day, compared to the proposed 3%.
While retail participation in options trading is anticipated to moderate, the lower-than-expected hikes could help soften the impact on the market. Small retail participants, defined as those with less than Rs 1 million in monthly premiums, account for less than 3% of system premiums. However, their reduced participation could disproportionately affect the profit and loss pool.
Regulatory Direction and Trading Behavior Changes
With the number of expiry days in a week reducing from five to two and a decrease in available products, the measures could lead to changes in trading behaviors among both individual and institutional participants.
Any spillover trading activity from discontinued products to ongoing products may mitigate the overall systemic impact on premiums. The outcome of these measures will likely inform SEBI’s future regulatory direction.
Divergent Impacts on Market Players
Jefferies anticipates that retail-focused discount brokers and exchanges, particularly the BSE, will be the most affected by the anticipated shrinkage in system premiums. Consequently, Jefferies has recently reduced its earnings per share (EPS) estimate for BSE by approximately 10%, considering the discontinuation of the Bankex product and focusing on the volume impact on continuing products like Sensex after the new regulations take effect.
Traditional brokers are expected to face a relatively lower impact, as the reduced margin hikes are likely to benefit their high-net-worth individual (HNI) clients, who typically engage more in option selling. Clearing members, such as Nuvama Asset Services, which cater to institutional players like high-frequency traders (HFTs) and foreign portfolio investors (FPIs), will experience marginal impacts. Other market participants, including asset management companies (AMCs), wealth managers, and depositories, are expected to remain unaffected by these measures.
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