SEBI Official Highlights Benefits of Long-Term F&O Contracts in Mitigating Market Volatility
To enhance the quality of India’s derivatives market, a senior official from the Securities and Exchange Board of India (Sebi) has proposed extending the tenure and maturity of futures and options (F&O) contracts. Ananth Narayan, a whole-time member of Sebi, highlighted concerns over the dominance of short-term derivatives in the domestic market, which he described as an unhealthy trend. Currently, Indian exchanges offer F&O products with a maximum maturity of three months, while many global markets provide options with maturities of up to one year. This disparity raises questions about the allocation of household savings, which are increasingly funneled into speculative trading rather than productive capital formation.
Concerns Over Speculative Trading
Ananth Narayan addressed these issues during a seminar hosted by the Confederation of Indian Industry (CII) in Kolkata. He emphasized that while derivatives play a crucial role in price discovery and market depth, the current trends in the Indian equity derivatives ecosystem warrant scrutiny. Research indicates that trading on expiry days can lead to increased market volatility and noise trading, which may undermine confidence in price formation. Narayan pointed out that the structure of the Indian F&O market is unusual, with index options turnover on expiry days often exceeding that of the underlying cash market by 350 times or more. This imbalance raises concerns about the potential adverse consequences for the market.
Impact on Individual Traders
A recent study by Sebi revealed alarming statistics regarding individual traders in the F&O segment. In the fiscal year 2025, nine out of ten individual traders reported net losses, with their combined losses exceeding ₹1 lakh crore—a staggering 41% increase compared to the previous fiscal year. Narayan noted that this significant sum could have been directed towards responsible investing and capital formation instead of speculative trading. The findings underscore the need for regulatory intervention to protect individual investors and promote a healthier trading environment.
Regulatory Changes and Future Outlook
In response to these pressing concerns, Sebi has amended F&O trading regulations to discourage short-term trading practices, including the use of weekly options contracts. Initial data suggests a shift in retail trading behavior following these changes. However, Narayan acknowledged that stock exchanges, clearing corporations, and brokers are apprehensive about the potential impact of these regulations on their revenues. He urged stakeholders to consider the sustainability of the current trading practices and the long-term implications for the market. The ongoing dialogue between regulators and market participants will be crucial in shaping a more balanced and productive derivatives market in India.
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