Derivatives Volumes Decline 37% in December as SEBI Implements Stricter Norms

Derivatives Volumes Decline 37% in December as SEBI Implements Stricter Norms

The derivatives market has witnessed a significant contraction, with volumes falling 37% month-on-month in December. This decline follows the Securities and Exchange Board of India’s (SEBI) recent measures aimed at curbing speculative activity and ensuring market stability.

Impact on Derivatives Turnover

The average daily turnover (ADTV) for the derivatives segment dropped to ₹280 trillion in December, a notable decline from ₹442 trillion in November. This marks the lowest ADTV since June 2023.

The drop in volumes coincides with SEBI’s introduction of key rules, such as:

One weekly expiry per exchange

Higher extreme loss margins (ELM)

These measures have successfully cooled speculative trading but also reduced liquidity in the segment.

Upcoming Changes in 2024

The market is bracing for further adjustments as SEBI’s revised contract sizes for Nifty 50 weekly derivatives take effect from January 1, 2024. The first weekly expiry with the updated contract size is slated for January 2, 2024.

Additionally, exchanges have discontinued weekly contracts for Nifty Bank and Bankex, and a 2% ELM now applies to short positions on expiry days to mitigate volatility risks.

SEBI’s Focus on Investor Protection

SEBI officials noted a sharp 35-40% drop in notional volumes, with premium volumes declining 8%. Interestingly, the value per contract has surged by 50%, signaling a shift towards higher-quality contracts.

While some traders have expressed concerns about the new norms, SEBI remains firm, citing its study showing that over 90% of individual traders incurred losses in the derivatives market. The regulatory body aims to prioritize investor protection and curb aggressive speculation.

Market Sentiment and Industry Response

Market experts believe SEBI’s stringent norms, coupled with a sharp correction in benchmark indices, have prompted a cautious approach among traders. In September 2023, derivatives turnover peaked at ₹537 trillion, driven by record highs in the Sensex and Nifty 50. However, a 10% market correction in less than three weeks has significantly impacted trading activity.

Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, remarked,

“The new SEBI norms, along with increased awareness campaigns about derivatives risks, have made new entrants more conservative.”

Future Regulatory Actions

SEBI plans to implement further measures in 2025, including:

Upfront premium collection and removal of calendar spread benefits (Effective February 1, 2025)

Intraday position monitoring (Effective April 1, 2025)

Exchange Perspective

Sundararaman Ramamurthy, MD & CEO of BSE, commented on the evolving landscape, stating,

“While notional turnover and the number of contracts traded have declined, improved premium quality could offset these changes by boosting income and reducing operational costs.”

Conclusion

SEBI’s reforms signal a paradigm shift in India’s derivatives market, steering it towards greater stability and transparency. While volumes may temporarily decline, the focus on risk management, quality trading, and investor awareness is expected to foster long-term market health.

Stay updated with the latest stock market trends at TradingThought.