The National Stock Exchange (NSE) on February 10 said it is hopeful that the recent increase in securities transaction tax (STT) on futures and options (F&O) will be reviewed and rationalised, even as the exchange acknowledged that the effect of the hike on trading volumes is difficult to quantify. The comments were made by NSE management during an investor call, according to exchange disclosures.

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NSE management said market participants had expected a reduction or rationalisation of STT, particularly in the cash market, in the Union Budget. Instead, STT was increased for both futures and options, leading to higher transaction costs. The management stated that the increase has added to overall trading costs across derivative segments.

STT Hike Seen As Negative For Futures Segment

According to NSE management, the increase in STT is viewed as negative for index futures and single-stock futures in particular. The exchange said futures are typically used by long-term investors for hedging purposes rather than by short-term traders. Higher transaction costs, it noted, could reduce the attractiveness of futures as a hedging tool.

NSE said multiple representations are being made to the government by market participants seeking a review or reconsideration of the STT hike. The exchange added that it remains hopeful that some form of review may be undertaken by policymakers.

Volumes Impact Remains Uncertain

Despite concerns around higher costs, NSE said the actual impact of the STT increase on derivatives volumes is uncertain. The exchange pointed out that in the past, periodic increases in STT have not led to a significant or sustained decline in trading activity, as markets have largely absorbed the additional costs over time.

On the proposal to withdraw calendar spread margin relief, NSE said discussions are ongoing between broker associations and regulators. The exchange added that the final decision will be taken by the regulator, with investor protection, particularly for small investors, as a key consideration.

NSE also noted that industry submissions have highlighted that retail participation in single-stock futures and options is already limited and has declined further over the past year following multiple market reforms. However, the exchange said it is uncertain how these representations will influence final regulatory outcomes.
Industry And Regulatory Developments

Broker body Association of National Exchanges Members of India (ANMI) has urged the government to review the STT hike, stating that total transaction costs in futures trading have nearly doubled, while options have seen a relatively modest increase of about 3%, according to ANMI statements. The body said higher costs could affect liquidity, participation, and risk management in the derivatives market.

To support liquidity in the cash market, NSE highlighted the securities lending and borrowing (SLB) framework as an area under review. The exchange said the Securities and Exchange Board of India (SEBI) has constituted a working group to examine the existing SLB mechanism, and any easing of norms could help improve market depth and liquidity, according to SEBI disclosures.