Mint Explainer: Impact of Sebi's planned measures for index derivative framework
Mint explains why Sebi is concerned with the rising trade volumes, the measures it plans to take, and the impact of these steps. Derivatives are financial contracts that derive their value from an underlying asset. Derivatives are of two types – futures and options contracts.
They help in better price discovery, improve market liquidity and allow investors to manage their risks better. The National Stock Exchange of India launched weekly options on the Bank Nifty index, the Nifty, the Nifty Financial Services index and the Nifty Midcap Select index in 2016. The BSE started Sensex weekly options in 2019.
Currently, one option expires on each day of the trading week. Following the pandemic of 2020, weekly options became a hit with retail and proprietary traders. In a consultation paper released on 30 July, the regulator pointed out that weekly index derivatives found favour with market participants, especially around their expiry.
This was evident by the hyperactive volatile trading Sebi found on expiry day compared with levels on other trading days. Index option volumes on the NSE, which enjoys a market share of over 90%, surged almost 13-fold to ₹138 trillion in FY24 from ₹10.8 trillion in FY20. This brought the market segment under Sebi’s radar.
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