NSE hopeful of review on STT hike, but management says difficult to predict impact on volumes

NSE hopeful of review on STT hike, but management says difficult to predict impact on volumes

• NSE hopes for review and rationalisation of recent STT hike on F&O trades
• Higher STT seen as negative for futures, impacting hedging and liquidity
• Broker body ANMI warns STT hike could hurt market stability and participation

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NSE is hopeful that the recent hike in securities transaction tax (STT) on futures and options (F&O) will be “reviewed and rationalised”.  During an investor call on Monday, NSE’s management said market participants were expecting rationalisation or reduction in STT, particularly for the cash market, in the Union Budget. Instead, STT was increased for both futures and options, adding to overall transaction costs. NSE management said, “The union budget was expected to reduce. Many people in the market were expecting that there could be a slight reduction in STT for cash market, but that did not happen. On the contrary, we have seen a small hike in both futures and options, STT."

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NSE management said the increase in STT is seen as negative for index futures and stock futures in particular, as futures are generally viewed as instruments for hedging by long-term investors rather than by short-term traders. The management said that many representations are being made to the government to review or reconsider the hike, and the exchange is hopeful that some review might be undertaken. Higher transaction costs, it said, could reduce the attractiveness of futures for genuine hedging purposes. NSE management said, “The increase in STT is seen as a negative for the index futures and stock futures, single stock futures in particular, because futures are generally seen as genuine instruments for hedging by long-term investors. They are not the instrument of choice for those who are traders”.

Therefore, a lot of representations are being made, we are aware of it, to the government to see if this can be reviewed or reconsidered. We are hopeful that some review might be undertaken on this”.

However, NSE added that the actual impact on derivatives volumes is difficult to quantify. In the past, periodic increases in STT have not resulted in a significant or sustained decline in trading volumes, as markets have largely absorbed the higher costs.

On the proposal to withdraw calendar spread margin relief, the exchange said discussions are ongoing between broker associations and regulators, but the final call will be taken by the regulator with a focus on safeguarding small investors. NSE noted that industry representations have pointed out that retail participation in single-stock futures and options is already limited and has declined further over the past year following the implementation of several market reforms. However, the exchange said it remains uncertain how these submissions will influence the final regulatory decision.

Broker body ANMI has urged the government to review the STT hike, warning that it disproportionately impacts futures trading, where total transaction costs have nearly doubled, compared with a modest 3 percent rise in options. It said higher transaction costs could hurt liquidity, risk management, and participation, especially as Indian markets are already costlier than global peers. ANMI added that retaining the earlier STT structure would help restore market stability, confidence and overall market vibrancy.

To support liquidity in the cash market, NSE pointed to the securities lending and borrowing (SLB) framework as a key area for reform. SEBI has constituted a working group to review the existing SLB mechanism, and any easing of norms could help deepen liquidity and improve market depth.