SEBI’s Regulatory Changes Have Minimal Impact on Option Premium Turnover

Earlier this year, the Securities and Exchange Board of India (SEBI) introduced stricter regulations on retail investors participating in the futures and options (F&O) segment of the Indian equity market. As per SEBI regulations, three new changes were implemented in the equity derivatives framework on November 20, 2024, including an increase in contract size for index derivatives, rationalisation of weekly index derivatives products and an increase in tail risk coverage on the day of options expiry.

December 2 to 6 was the first week where the full impact of these new regulations was experienced by both the exchanges (BSE and NSE). The said week had only two weekly expiries (NIFTY on Thursday and SENSEX on Friday) compared to six weekly expiries before November 20, 2024.  

In the first week of December 2024, the post-regulatory changes show no major impact on aggregate option premium turnover while there has been a significant decline in notional turnover and number of contracts.

“While sustainable trends will emerge over time, we believe that regulations could ultimately strengthen the capital market fundamentals. Long-term potential remains strong with the expansion of user base and companies, which has also been our view in the past,” ICICI Securities said in a report on Tuesday.

Here is how the various components of derivatives volumes were impacted:

Decline in Notional Turnover

The impact of fewer weekly expiries was witnessed in the total trading value. For example, the NSE's notional ADTV (average daily trading value) for index options dropped to Rs 207 trillion in the first week of December 2024, compared to Rs 357 trillion in the first week of November 2024, a 42 per cent drop. A similar trend was seen at BSE, where the notional ADTV fell to Rs 80 trillion in the first week of December 2024, from Rs 104 trillion in the first week of November 2024, a 22 per cent decline.

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Premium Turnover Remains Stable

Despite the decline in notional turnover, premium turnover remained stable for both exchanges. Premium ADTV for NSE index options stood at Rs 545 billion in the first week of December, up 0.3 per cent from Rs 543 billion in November this year. BSE premium ADTV rose 2 per cent to Rs 83 billion in the first week of December from Rs 82 billion in November 2024. A decrease in notional ADTV and an increase in premium ADTV have led to an increase in percentage premium for both exchanges.

Lower Number of Contracts

The total number of index option contracts for NSE declined by 38 per cent to 1,658 million in the first week of December 2024 compared to 2,686 million in the first week of previous month. For BSE, a total number of index option contracts stood at 491 million, down 22.9 per cent from 637 million in the first week of November 2024.

According to analysts at ICICI Securities, the decline in contracts may be attributed to a reduced volume of OTM contract trading on expiry days. Additionally, the decrease could be due to the higher lot size in newly written contracts. This reduction in the number contracts will result in lower clearing costs for both exchanges, as these costs are tied to the volume of contracts.

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Shift in Trading to Monthly and Benchmark Contracts 

Since November 20, 2024, weekly expiry contracts for BANK NIFTY, MIDCAP NIFTY, and FIN NIFTY no longer exist, and all trading volumes for these have shifted to monthly contracts. In December 2024, the daily premium turnover for BANK NIFTY monthly contracts surged 377 per cent to Rs 122 billion, MIDCAP NIFTY increased 819 per cent to Rs 5.12 billion, and FIN NIFTY rose 575 per cent to Rs 3.98 billion compared to the average of the last 11 months.

However, despite this shift, it hasn't fully offset the loss of weekly volumes. In December 2024, the premium ADTV for these contracts remained lower than in November 2024, reflecting the impact of the change, according to the ICICI Securities report.

In addition, the loss of premium volume seen in BANK NIFTY, FIN NIFTY, and MIDCAP NIFTY has partially shifted to SENSEX and NIFTY contracts. In the first week of December 2024, NIFTY premium ADTV increased by 82 per cent to Rs 413 billion, compared to Rs 225 billion in the average of the last 11 months (11MCY24). Similarly, SENSEX premium ADTV rose by 63 per cent to Rs 83 billion in the first week of December 2024, compared to Rs 51 billion in the last 11 months.

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No Impact on Cash Segment

In the first week of December 2024, NSE's cash ADTV stood at Rs 1.15 trillion, up 14.1 per cent from Rs 1 trillion in November 2024, while BSE's cash ADTV increased by 15.8 per cent to Rs 73 billion, compared to Rs 63 billion in November 2024. However, these figures are still below the highs seen in June 2024, when NSE's cash ADTV was Rs 1.5 trillion and BSE's was Rs 119 billion.

For index futures, NSE's ADTV in the first week of December was Rs 305 billion, up 3.5 per cent from Rs 294 billion in the first week of November, but down 11.3 per cent from Rs 333 billion in November. This indicates no significant shift in the index futures or cash segments following regulatory changes.

The brokerage firm has maintained a ‘BUY’ rating on the BSE Ltd stock with a target price of Rs 5,743, adding that we should give time for sustainable trends to emerge.