Are SEBI’s Equity Derivatives Rules Restraining Risk or Reshaping the Future

The issue of disproportionate increase in speculative trading in equity futures and options persists, despite hard-hitting regulatory measures to strengthen the derivatives framework. The budget proposal introduced an increased Securities Transaction Tax on F&O trading as a fiscal curb to check excessive speculation and intensify SEBI interventions. Predictably, the market reacted with disappointment, burdened with increased trading costs amid declining F&O activity. Their jittery reactions reflect prolonged strain from the conservative regulatory approach, adding new burdens and frictions.

Since early 2024, financial regulators’ concerns about asset price bubbles have intensified amid surging retail participation in equity F&O trading. The market regulator has been highlighting the abnormal trading near F&O expiry days, having serious implications for investor protection and market stability.

Following the SEBI January 2023 report, repeated regulatory emphasis—nine out of ten individual equity F&O traders lost ₹125,000 on average during 2018-19 and financial year 2022 to financial year 2025 created unfavorable perceptions of equity derivatives. The above trend of significant losses among individual traders persisted in SEBI’s July 2025 comparative study too. 

Excessive Caution?
A close review of SEBI circulars since May 2024 reveals extensive regulatory measures to strengthen the equity derivatives framework. These guidelines introduce a revised framework for price bands and eligibility criteria for stock entry/exit, updated norms on option premium, spread treatment, margin offsetting, tail risk coverage, contract size, and weekly contract rationalisation. Critical interventions encompass new measures for open interest, position limits monitoring, F&O ban periods, pre-open sessions, and non-benchmark index derivatives eligibility.

Regulatory conservatism aside, overly prescriptive stipulations, such as mandating all equity derivatives contracts expiry of an exchange on specific days, restrict exchanges’ abilities to differentiate products.

Loss-Making Gordon Gekkos
Without clear linkage to portfolios or declared F&O trading motives, classifying any trade as speculative or hedging remains guesswork. Beyond broad-level cash to derivatives, derivatives turnover to GDP and open interest to turnover ratios, no regulatory tool credibly determines the level of unhealthy speculation. The answer to this question is hidden in the underlying details of the SEBI September 2024 analysis. Beneath the surface of SEBI’s September 2024 analysis lies a skewed distribution of F&O losses. It revealed 10,800 traders lost over ₹10 million each, averaging ₹20 million during financial year 2022 to financial year 2025. The top 3.5% of loss‑makers, about 400,000 traders, averaged ₹2.8 million per person, accounting for 55.3% of total losses.

Importantly, SEBI ICDR Regulations define retail investors as those applying for securities in public issues up to ₹200,000, but their threshold for secondary market activity remains unclear. While the motive of the above traders making heavy losses year after year remain unknown, the issue demands deeper scrutiny, not only for market abuse or manipulation safeguards but also for anti‑money laundering and tax evasion considerations.

Regulatory Measures Efficacy
Despite extensive stipulations and prescriptive rules, SEBI’s July 2025 comparative study showed mixed signals. During December 2024-May 2025-i.e., six months after the enhanced framework, the number of individual traders declined 20% versus the previous year but rose 24% versus two years earlier. Individual traders’ net losses increased 41% to ₹1.06 trillion in 2024-25, while 91% of traders continued incurring losses.

The leading exchange, NSE witnessed equity derivatives turnover recording a 20% fall between 2024 and 2025, with traded contracts of index options plunging 74%. Yet overall equity derivatives turnover in 2025 rose 19% versus 2023. The above findings reveal continued vulnerabilities despite stricter regulatory norms, raising questions about the effectiveness of interventions.

Frequently shifting rules create a perception of regulatory uncertainty, dampening market mojo and investor interest. Going by recent news, SEBI has hinted at pausing immediate regulatory interventions, bringing temporary relief to market infrastructure institutions and intermediaries.

As global markets expand products like digital assets derivatives, prediction contracts, and extend 24/7 hours trading, Indian markets cannot remain constrained by restrictive norms. To drive accelerated capital formation, enhanced investor protection, market efficiency, and resilience, the regulator must shift its focus to addressing structural issues, rapid capacity-building, and fostering innovation in the market practices.

Critically, for products under joint supervision with the RBI, regulators should pragmatically align their priorities and frame resilient frameworks for introducing derivatives on interest rates, bond indices and redesigning currency derivatives to attract global investors and strengthen India’s financial market competitiveness.