Synopsis: The market regulator SEBI's proposed measures to regulate futures and options (F&O) trading are expected to significantly impact the NSE and BSE, potentially reducing market volumes by 30-40%.
The Securities and Exchange Board of India's (SEBI) proposed measures to regulate futures and options (F&O) trading are anticipated to have a substantial impact on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
According to IIFL Securities, these measures could result in a 30-40% decline in market volumes.
Impact on NSE and BSE Earnings:
IIFL Securities projects a significant impact on the earnings of both exchanges.
NSE, where options account for 60% of revenues, could see its FY26 earnings reduced by 25-30%.
In contrast, BSE, with 40% of its revenue from options, might experience a 15-18% earnings decline.
Measures Affecting Market Volumes:
Among SEBI's seven proposed steps to curb retail speculation in derivatives, the rationalization of weekly options is expected to have the highest impact.
Currently, index options represent 98% of total volumes.
SEBI's proposal to allow only a single benchmark index per exchange and to increase the contract size by 2-3 times is likely to deter small retail investors, leading to a higher decline in investor count than in volumes.
Challenges for Discount Brokers:
Discount brokers, who rely heavily on retail investors, are expected to face the greatest challenges.
SEBI's measures, such as increasing the Exposure Limit Margin (ELM) around expiry and withdrawing calendar spread margin on expiry, will raise margin requirements, potentially impacting liquidity.
IIFL Securities foresees a more significant impact on discount brokers than on traditional full-service brokers.
Specific Impacts on NSE and BSE:
NSE's option volumes, particularly from its biggest contract, Bank Nifty, which contributes 50% of its option premium volumes, will be hit hard as it transitions to monthly contracts.
This change, along with others, could reduce NSE's full-year volumes by approximately 30-35%. BSE, with only two contracts, is expected to experience a lower impact.
The Sensex contributes 85% of BSE's volumes, and the potential contribution of Bankex by FY26 could keep the impact lower compared to NSE.
Effects of Increased Contract Size:
SEBI's proposal to increase the minimum contract size may affect retail investors significantly.
Although 46% of NSE's unique investors trade less than Rs. 1 lakh in monthly premium turnover, they only contribute 0.2% of the option premium turnover.
This could lead to a higher decline in investor count, particularly among retail investors who frequently roll positions.
Rationalization and Upfront Premium Collection:
Rationalization of options strikes is expected to have a marginal impact on stock exchanges, as far-out-of-the-money strikes contribute little to premium volumes.
Additionally, most brokers already collect premiums upfront, which should mitigate the impact of this measure.
In conclusion, SEBI's proposed measures to regulate F&O trading are likely to have significant repercussions for NSE, BSE, and discount brokers.
While these steps aim to reduce speculative trading and make the market healthier, they may also lead to a substantial decline in market volumes and earnings for the exchanges, with discount brokers facing the brunt of the impact.
Disclaimer: We provide stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
