India’s capital markets regulator, SEBI, along with the Finance Ministry, is seriously mulling over sweeping reforms in the rapidly growing segment of options trading, particularly weekly expiries. According to sources familiar with the matter, the government and regulatory bodies believe that current option trading practices are becoming overly speculative and not contributing meaningfully to the broader economy. A discussion paper is expected soon, inviting stakeholder consultation before any formal decision is implemented.
Weekly Expiry Under the Scanner
One of the biggest changes under consideration is the modification or potential phasing out of weekly options expiry. The Finance Ministry has reportedly told SEBI that the weekly expiry system promotes excessive speculation rather than productive hedging or investment behavior. Sources indicate that there are currently two possible proposals being discussed:
Replace weekly expiries with bi-monthly or monthly contracts to reduce speculative trading activity.
Impose stricter margin norms and increase entry barriers for retail traders in the derivatives market.
Margin Rebalancing Between Cash and Derivatives Market
A second point of focus is the disparity in margin requirements between cash market transactions and options trading. Currently, traders require a higher cash margin in the equity segment compared to the derivatives market. SEBI is now considering increasing the margin requirements for options trading to bring them more in line with those applicable in the cash segment. The goal is to disincentivize short-term speculative positions and encourage more balanced participation.
STT (Securities Transaction Tax) Revisions in Discussion
Another key area being looked into is taxation. At present, STT on cash market trades is relatively high compared to that on options. This has made options more attractive for traders. SEBI is considering recommending changes that would increase the STT on options to reduce speculative volumes. However, officials acknowledge that such tax-related measures can only realistically be implemented through the Union Budget, making this a medium-term consideration.
Discussion Paper and Stakeholder Consultation
SEBI is expected to release a discussion paper in the coming weeks, laying out these three proposals:
Replacement of weekly expiry with less frequent expiry cycles.
Rationalization of margin structures between cash and options segments.
Revisiting STT rates applicable to options trades.
This paper will undergo stakeholder consultation, and the feedback received will then be presented to the SEBI board. Only after the board’s approval will any of these regulatory changes be finalized and implemented.
Historical Context: SEBI’s Stance on Derivatives
SEBI has, over the last few years, consistently flagged concerns over the rise in retail participation in the derivatives segment, especially given the high failure rate among retail traders. Data suggests that 90–95% of retail investors in derivatives end up making losses. These statistics have caught the attention of the Finance Ministry, which is now working in tandem with SEBI to reassess the framework.
Industry Reactions: Concerns Over Overregulation
Market experts, including institutional voices, have raised concerns over the unintended consequences of such regulations. One of the key arguments is that many steps have already been taken in the past year to reduce excessive risk in options trading. These include:
Reduction in margin benefits for certain stocks.
Limitation of weekly options to one index per exchange.
General tightening of margin norms across the board.
Analysts caution against excessive regulatory intervention that could choke off genuine market depth and hedging opportunities for institutional participants. A more balanced view suggests that instead of outright curbs, SEBI should consider setting minimum capital thresholds for retail investors participating in derivatives, so that only those with adequate financial buffers can engage in such trades.
Rising Cost of Trading
Another major point of contention is the increasing cost burden on traders and investors. Charges such as:
SEBI transaction fees
Exchange fees
Clearing and settlement charges
Cash management charges
STT
GST
Stamp duty
...are collectively placing a heavy load on participants. Experts argue that if the aim is to protect retail traders, the focus should not only be on curbing speculation but also on reducing trading costs to make the ecosystem more sustainable.
Need for Long-Term Policy Stability
Critics have also called for regulatory stability. Frequent regulatory changes, often every six months, make it hard for traders and brokers to adjust and create sustainable business models. There is a growing sentiment that SEBI and the government should adopt a 3-year policy roadmap, making only necessary adjustments during emergencies, and providing a more predictable framework for participants.
Reforms Should Promote Investment, Not Punish Gains
Industry veterans have highlighted a key contradiction: while the government collects substantial revenue through STT, it also imposes capital gains tax (short-term and long-term), often leading to double taxation. Many believe the original promise of 0% long-term capital gains made when STT was introduced should be reinstated to promote genuine long-term investing and reduce the overall tax burden on investors.
Final Word
As SEBI and the Finance Ministry gear up for a potential overhaul of the derivatives market, especially options trading, the coming months could be pivotal for retail traders, brokers, and institutional investors alike. While the intent to safeguard retail investors is commendable, any changes must be balanced, data-driven, and sustainable in the long run. The upcoming discussion paper and subsequent stakeholder feedback will likely shape the next phase of India’s evolving financial market regulations.
