SEBI may soon consider extending the tenure of Futures and Options (F&O) contracts to improve the quality of India’s derivatives market. This comes after concerns were raised over the massive volumes seen in short-term contracts, especially on expiry days.
“We must look to improve the quality of our derivatives market by extending the tenure and maturity of the products,” said SEBI whole-time member Ananth Narayan on July 17 at the CII Capital Markets Conclave in Kolkata.
Expiry Day Trading Raising Volatility Risks
Narayan highlighted that the Indian derivatives market is seeing disproportionately high turnover on expiry days, especially in index options. He pointed out that on these days, the derivatives turnover can be 350 times higher than the cash market, which he termed as “an unhealthy imbalance”.
“Such high-volume expiry day trading increases market volatility and can result in noise trading,” he added.
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Short-Term F&O vs Long-Term Capital Formation
Referring to research insights, Narayan explained that short-term derivatives, especially expiry-day F&O trading, may harm price discovery and reduce confidence in the market.
He also raised concerns that these trading patterns may not contribute to long-term capital formation, which is critical for a stable financial market.
Focus on Deepening Cash Equities Market
Apart from regulating the derivatives market, Narayan emphasised the need to deepen India’s cash equities market to create a more balanced and stable trading environment.
“We must explore ways to deepen our cash equities markets even as we enhance our derivatives segment,” he noted.
