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Sebi Planning to Make Tweaks to Address Option Trading Risks 

The proposed changes are still in the discussion stage.

India’s markets regulator is contemplating several adjustments to its derivative trading rules to mitigate risks associated with the rapid growth in options trading. The proposed changes, discussed over the past four months with exchanges, brokers, and fund houses, could include higher margins for options contracts and enhanced disclosure requirements.

In recent years, trading in index and stock options in India has surged, primarily driven by retail investors. This increase has raised concerns among market participants and government officials. The notional value of index options traded more than doubled in 2023-24, reaching $907.09 trillion compared to the previous year.

Last month, India’s federal finance minister highlighted the potential future challenges posed by the unchecked growth in retail trading of futures and options, which could affect market stability, investor sentiment, and household finances.

One of the regulator’s initial steps may involve linking options trading to the underlying cash volumes of a stock to control the accumulation of open positions in less liquid stocks. If there is an excessive build-up of options positions relative to cash volumes, the margin requirements for trading options would increase.

In India, options volumes are roughly four times the underlying cash trading volumes, whereas the global average ranges from 5 to 15 times. The government has also suggested that the regulator consider increasing the lot sizes of options contracts to prevent very small investors from entering the market.

The proposed changes are still in the discussion stage and will be put up for public consultation in the next few months before they are formally introduced into the market.

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