BSE to stop derivatives trading on Sensex 50, Bankex

MUMBAI: In a significant move aimed at curbing speculative trading, the Bombay Stock Exchange (BSE) announced the discontinuation of weekly index derivatives contracts on the Sensex 50 and Bankex, following new directives issued by the Securities and Exchange Board of India (SEBI).

The BSE stated that these weekly contracts on the Sensex 50 will cease to exist from November 14, after the expiry of existing contracts, and no new weekly contracts will be generated.

Similarly, the weekly index derivatives contracts on Bankex will be discontinued from November 18, with existing contracts remaining valid until their scheduled expiry dates.

Sebi’s tightening

This decision comes in response to SEBI’s recent tightening of the framework governing equity index derivatives.

The regulator’s objective is to minimise excessive speculation in the derivatives market, which can lead to increased volatility and risks for retail investors.

Under the new guidelines, exchanges are allowed to offer weekly expiry derivatives for only one benchmark index. This restriction is designed to simplify trading and mitigate the potential for speculative behaviors that can disrupt market stability.

Background

The BSE’s announcement reflects ongoing regulatory efforts to enhance the integrity and stability of the Indian financial markets.

 In recent years, the derivatives market has seen a surge in trading volumes, leading to growing concerns among regulators about speculative trading practices that can distort market dynamics.

Weekly contracts, while popular for their short-term trading opportunities, have been criticised for encouraging high-frequency trading strategies that may not align with the long-term interests of investors.

In conjunction with the discontinuation of weekly index derivatives, SEBI has implemented several additional measures aimed at promoting responsible trading practices. These include:

1. Increased minimum contract size: This change aims to ensure that traders have a more substantial financial commitment in their trades, potentially reducing the frequency of speculative positions.
2. Upfront collection of option premiums: By requiring traders to pay premiums upfront, SEBI seeks to enhance transparency and ensure that participants are fully aware of their financial obligations.
3. Intra-day monitoring of position limits: This measure will enable real-time oversight of traders’ positions, allowing regulators to intervene if trading becomes excessively speculative.
4. Removal of calendar spread benefit on expiry day: This change targets a specific trading strategy that could be exploited for speculative gains, ensuring that trading practices remain fair and equitable.
5. Rationalisation of weekly index derivatives: By limiting the number of weekly contracts to one benchmark index, SEBI aims to streamline trading and reduce the complexity that can lead to erratic price movements.

These regulatory measures are part of a broader strategy to enhance market resilience and protect investors, especially retail participants who may be more vulnerable to the risks associated with high-frequency and speculative trading.

As the financial landscape evolves, such adjustments are crucial for maintaining the integrity and stability of India’s capital markets.

The discontinuation of these contracts may lead to a shift in trading strategies among market participants, who will need to adapt to the new regulatory environment while seeking opportunities in a landscape increasingly focused on sustainable trading practices.