A panel of the Securities and Exchange Board of India (SEBI) has endorsed a proposal for margin rationalisation in the cash trading segment, signaling potential changes to current margin requirements for market participants.

Regulatory Development

The SEBI panel's endorsement of the margin rationalisation proposal indicates the regulator's consideration of adjusting the existing margin framework in the cash segment. This development suggests that current margin requirements may undergo modification as part of the regulatory review process.

Expected Impact on Cash Segment

The proposal is likely to result in reduced margins for the cash trading segment. This potential reduction in margin requirements could affect how market participants approach equity trading in the cash market.

Market Implications

The endorsement by the SEBI panel represents a step forward in the regulatory process for margin adjustments. The rationalisation proposal addresses the current margin structure in the cash segment, which forms a significant portion of equity market trading activity.

The development comes as part of ongoing regulatory reviews aimed at optimizing market structure and trading mechanisms. The panel's support for the proposal indicates alignment with broader regulatory objectives for the securities market.

India's derivatives market faces continued uncertainty as traders await clarity on potential additional restrictions to weekly options contracts, following successful regulatory measures that curbed excessive retail speculation. The Securities and Exchange Board of India (SEBI) has not provided updates since August regarding potential elimination of the remaining weekly contracts on benchmark indices.

Current Regulatory Landscape

SEBI's comprehensive clampdown has already transformed the derivatives market through several key measures. The regulator eliminated most weekly options contracts in November 2024, allowing exchanges to maintain only one weekly contract each. The National Stock Exchange selected the Nifty 50 Index, while BSE chose the Sensex Index as their respective underlying securities.

The regulatory framework also included higher margin requirements and stricter position limits, creating a more controlled trading environment. These measures addressed concerns about retail investors losing billions of dollars on derivatives trading.

Market Impact and Volume Changes

The regulatory intervention has produced measurable results in trading activity. Derivatives turnover on the National Stock Exchange declined significantly, reflecting the effectiveness of the implemented measures.

Weekly options contracts had become central to India's derivatives boom, with the Nifty Bank Index weeklies previously accounting for more than half of all index options turnover. In December, index options volume on weekly expiries more than tripled compared to other trading days, demonstrating their popularity among market participants.

Industry Perspectives on Market Evolution

Market participants express mixed views on the regulatory changes and their long-term implications. Some emphasize the continued importance of weekly contracts for hedging strategies, while others support the normalization process.

Concerns about further restrictions include:

• Potential drastic reduction in trading volumes
• Limited short-term hedging instruments for foreign and local traders
• Impact on market liquidity and participant engagement

Positive aspects of regulation:

• Healthier mix of market participants
• Reduced retail speculation risks
• More sustainable market structure

Despite volume declines, average daily notional turnover has shown signs of recovery from early 2025 lows. Listed exchanges have reported better-than-estimated quarterly earnings with increased market share for equity options, suggesting underlying market resilience.

Global Context and Future Outlook

The Indian regulatory approach contrasts with global trends toward shorter-dated options contracts. International markets have embraced brief-duration instruments, with zero-days-to-expiry options gaining significant popularity in major financial centers.

Market experts anticipate continued growth in India's options market through institutional participation and expanded stock options offerings. The focus has shifted toward sustainable development rather than volume-driven expansion, potentially creating a more stable foundation for long-term market evolution.