Unprecedented Growth in Derivatives Trading
- India has become the world’s largest derivatives market, with:
- $6.4 trillion notional turnover per day
- Annual option premiums of $2.2 trillion in 2024
- The ratio of derivatives-to-cash market volumes in India is the highest globally.
SEBI’s Initial Measures (Effective from November 2024)
- Concerns: Overheated market activity and 90% loss rate among retail investors (SEBI study).
- Measures introduced:
- Limit of one weekly expiry per exchange
- Increase in minimum contract size
- Upfront premium collection
- Removal of calendar spread benefits on expiry days
Visible Impact of Measures
- Monthly expiries reduced from 20 to 8.
- Average premium per index option increased from ₹1,300 (Nov 2024) to ₹3,000 (Feb 2025).
- Share of zero-day-to-expiry options fell from 70% to 50% of volumes, and 40% to 20% of total premiums.
- Notional daily traded value of options dropped by 35% ($5 trillion to $3.2 trillion).
- Option premium turnover saw only a 15% decline, showing resilience in structured trading.
- Cash market volumes dropped by 12% (Feb vs. Nov 2024), aligning with derivatives moderation.
- In March 2025, derivative volumes rebounded by 20% month-on-month with improving market sentiment.
Current Derivative-to-Cash Market Ratios
- Option premium turnover to cash turnover ratio remains high at 0.54x (Feb 2025).
- On a notional basis, derivatives-to-cash volumes are still extremely high at 300x (down from 400x in Nov).
SEBI’s New Consultation Paper (February 2025)
- Proposed moves for orderly conduct and market stability:
- Delta-based (future equivalent) calculation for market-wide position limits for stock and index derivatives.
- Linking single stock derivative limits to underlying cash delivery volumes.
- Enhanced entity-wise derivative position limits, introducing intraday monitoring alongside end-of-day limits.
- Delta-based exposure monitoring is considered more accurate for price sensitivity and aligns with global regulatory standards.
- The new 15% free float-based limit is more liberal compared to the earlier 20% notional-based cap.
- Under this framework, the number of stocks falling under derivatives ban is projected to drop by 90% (from 366 to 27).
Intraday Limits and Safeguards
- End-of-day limit for individual entities: ₹500 crore (on a future-equivalent basis).
- Gross entity-wise limit: ₹1,500 crore.
- Intraday limits introduced to prevent market domination and sudden volatility caused by large players.
- SEBI is also pushing for diversified benchmarks to reduce the chance of index manipulation.
Retail Participation and Market Outlook
- Retail derivatives traders have grown from 700,000 to 3.7 million in five years.
- Despite regulatory tightening, India’s options market remains a key attraction for both global and domestic investors.
- Given its scale now surpasses the cash market, orderly growth and strict supervision are crucial for long-term equity market health.
India’s derivatives market has seen unpa