Regulatory body SEBI aims to lengthen the duration of derivatives contracts, intending to bolster liquidity in cash equities markets.
In a significant move to address concerns in the Indian derivative market, the Securities and Exchange Board of India (SEBI) has introduced regulatory changes in October 2024 and May 2025. These changes aim to foster a healthier and more transparent derivatives market ecosystem, particularly focusing on curbing the dominance of short-term derivatives trading and enhancing market quality and transparency.
SEBI's measures to curb excesses in ultra-short-term derivatives trading, particularly heavy volumes of expiry-day index options, are a key part of these reforms. The regulator has highlighted that expiry-day trading volumes often exceed the cash market volumes multiple times, which is unhealthy and risks market integrity. To address this issue, SEBI plans to extend the tenure and maturity of derivative products to improve product quality and deepen the cash equities market.
In addition to these measures, SEBI will enhance oversight through real-time surveillance and algorithmic audits. This increased scrutiny will cover trading patterns, expiry-day volume controls, and audits of algorithmic trading systems to deter exploitative trading and promote responsible participation from quantitative trading firms.
Another significant change involves tightened compliance and transparency for foreign investor exposure via Offshore Derivative Instruments (ODIs). Starting May 2025 and effective November 2025, new rules mandate full transfer tracking, sub-account look-through, and identification of end investors for Participatory Notes (P-notes). These steps aim to close loopholes where instruments mimicking P-notes but outside SEBI scrutiny could build large undisclosed positions.
These changes are part of a broader effort to address investor losses from derivatives trading, where most retail traders incurred net losses amounting to over ₹1 lakh crore in FY25. They also aim to discourage manipulative practices such as those highlighted in SEBI's action against hedge fund Jane Street earlier this month, which involved manipulation across cash, futures, and options markets.
Ananth Narayan G, a whole-time member of SEBI, emphasized the need to deepen cash equities markets in India and called for a constructive dialogue among all stakeholders to address the issues in the derivative market. Narayan suggested extending the tenure and maturity of derivative products to improve the quality of the derivatives market.
The 11th Capital Markets Conclave organized by the Confederation of Indian Industry (CII) in Kolkata on July 17, 2025, saw Narayan expressing concerns about the sustainability of the current situation in the derivative market. He reiterated the need for a healthy and transparent derivatives market ecosystem and highlighted the ongoing efforts by SEBI to achieve this goal.
As these changes are implemented, the Indian derivative market is expected to undergo significant transformation, fostering a healthier and more transparent environment for all participants.
- Ananth Narayan G, a member of SEBI, advocates extending the tenure and maturity of derivative products to improve product quality and deepen the cash equities market.
- SEBI's efforts to curb the dominance of short-term derivatives trading and enhance market quality and transparency also include addressing excessive expiry-day index options trading volumes.
- In a move to close loopholes for foreign investor exposure via Offshore Derivative Instruments (ODIs), SEBI mandates full transfer tracking, sub-account look-through, and identification of end investors for Participatory Notes (P-notes) from May 2025.
- The increased scrutiny through real-time surveillance and algorithmic audits by SEBI aims to deter exploitative trading and promote responsible participation from quantitative trading firms.
- The ongoing regulatory changes in India's derivative market aim to discourage manipulative practices, such as those exposed in SEBI's recent action against hedge fund Jane Street.
- In the 11th Capital Markets Conclave organized by the Confederation of Indian Industry (CII), Narayan emphasized the need for a healthy and transparent derivatives market ecosystem, reiterating ongoing efforts by SEBI to achieve this goal.
