SEBI Chief Hints at Second Round of F&O Regulations Within a Month

The Securities and Exchange Board of India (SEBI) has initiated the second series of regulations pertinent to the Futures and Options (F&O) segment. This move is designed to protect the integrity of financial markets in India. SEBI emphasised the initiative to restrain speculative trading and protect retail investors from apprehensive swings in the market.

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Strengthening Market Discipline

According to the latest proposals in the consultation paper dated February 25, 2025, rules on equity stock and index derivatives are proposed to be tightened. One major proposal is the single-stock derivative position limit reduction that links it with the liquidity of the underlying cash markets. Specifically, SEBI wants the market-wide position limit for single-stock derivatives to be lower than 15% of free-float market capitalisation or 60 times the average daily delivery value. 

Also, SEBI wants to introduce harsh conditions on index derivatives. Derivatives on indices other than benchmark indices, such as BSE Sensex and NSE Nifty 50, would be allowed only if the index had a minimum of 14 constituents, with the top three not exceeding a total weightage of 45% and the top constituent not exceeding 20%. 

Introducing Pre-Open Sessions

To enhance price discovery and reduce volatility, SEBI has proposed introducing a pre-open session in the futures market, mirroring the practice in the cash market. This session would initially apply to current-month futures on both single stocks and indices. 

Contextualising the Reforms

These proposals follow a series of measures announced in October 2024, where SEBI increased the minimum contract size for derivatives from ₹5–10 lakh to ₹15 lakh, imposed higher margin requirements, and mandated the upfront collection of option premiums from buyers. The market regulator also limited weekly expiries to one per benchmark index per exchange and introduced intraday monitoring of position limits as well. 

These reforms stem from worries over the explosive rise of options trading, primarily by retail investors. According to data, options trading has reached a very high level in India, with the notional value of index options trading more than doubling in 2023-24 to $907.09 trillion. 

Protecting Retail Investors

A key focus area of SEBI's initiatives has been protecting the investment interests of retail investors who have increasingly entered the derivatives market. Research revealed that over 93% of retail traders have incurred a loss amounting to ₹1.8 trillion in the F&O segment in the past three financial years. 

SEBI's allegations claim that it would raise the entry barriers and make the derivatives trading closer to the cash market fundamentals rather than being speculative to mitigate risk and ensure that only those with adequate monetary capability and understanding qualify for such activity.

Industry Response and Future Outlook

Though these measures are commended for improving the market's stability, they also raise apprehensions among brokers and traders about possible consequences for trading volumes and liquidity. Some analysts suggest a 35-40% reduction in order volume and a 10-15% decrease in premium turnover once the regulations are fully enforceable. 

SEBI is eliciting responses during the consultation period up to March 17, 2025, showcasing its willingness to engage market participants and weigh their thoughts before finalising the regulations. With these reforms representing a significant milestone in developing a more resilient and investor-friendly trading environment, the Indian derivatives market is still growing.