New F&O Rules: Short term impact on volumes before market stabilises, say experts

New F&O Rules: Short term impact on volumes before market stabilises, say experts

The new regulatory framework for the equity derivatives segment will cause some short-term impact before stability returns, said leading experts from the market at the Moneycontrol Fintech Conclave in Mumbai on December 18.

Prabhakar Tiwari, Chief Growth Officer at Angel One, acknowledged the phenomenal market growth witnessed post-COVID and emphasized that the regulations are introduced with the right intentions. “SEBI’s regulations, particularly the guardrails introduced, are necessary. However, there will be an initial impact. The market has already adjusted to a 30% drop in volume, and we anticipate further behavioural changes based on the customer mix and other factors,” he said, noting that this adjustment phase may last a couple of quarters.

Globally, Ujjwal Jain, CEO, Share.Market noted that derivatives are used for hedging and even in India it started on that note. "But, somewhere where the segment was maturing some gaps stayed, which led to retail participation in a way F&O should not be traded. Using derivatives as a product to hedge and to manage risk was not understood well by retail investors,” he said.

“(With regulations) participation from certain types of traders might decrease, and trading volumes could dip. However, as seen in markets like South Korea and China, such restrictions typically lead to gradual changes rather than abrupt collapses. Over time, we expect new traders and investors to enter the market, driving innovation and growth. While participant behavior and product preferences may shift, overall participation will recover,” Tiwari added.

Shripal Shah, Managing Director and CEO of Kotak Securities, agreed that excesses have emerged in the F&O space and that regulatory measures are necessary. “In F&O, I believe excesses have been created, and every regulator seeks to address these. The primary purpose of regulation is to ensure orderly growth. To that extent, the recent measures are a step in the right direction and will likely achieve the desired effect,” he said.

Shah also highlighted the initial impacts already visible in the market. “We have seen a couple of measures implemented, resulting in noticeable effects, such as a cooling down of volumes, particularly at lower retail participation levels. These measures appear thoughtfully calibrated—they are not disrupting the entire market but are achieving the intended effect overall,” he added.

One of the measures announced by the regulator includes the scrapping of weekly expiries, a move met with mixed reactions. Tiwari expressed concerns, stating, “I don’t see a reason for the regulator to completely scrap weekly expiries. Without retail participation, liquidity will diminish. Institutional players alone cannot bring sufficient liquidity.”

Sandeep Bhardwaj, Chief Operating & Digital Officer, HDFC Securities adds that from cost to opportunities, there were many opportunities to play with weekly expiries. “Now, when the consolidation of weekly expiries goes down, and the bond rate size goes up, that will obviously create a lesser opportunity to participate. That will bring down not only turnover, but also opportunity to invest in derivatives. And then what eventually was the regulator's concern, that heavy participation of the retail investors and losing money,” he adds.

While one might argue that there is very little participation, but then in terms of losses and unproductive use of money, it comes to a lot, said Bharadwaj.

“The industry is still growing. Our penetration to the industry is not very high. The newer participants coming with far more knowledge will take industry ahead. We may not sustain, maybe for a few quarters, maybe for a few years, the kind of turnovers which we were doing in the past. But we are optimistic and positive as far as industry is concerned,” he added.