Regulatory tightening cools index options activity; market shows signs ofstabilisation: ICRA

New Delhi, May 22 (PTI) Trading activity in index derivatives and options is showing signs of stabilisation, after three consecutive months of decline triggered by regulatory interventions, rating agency ICRA said on Thursday.

This stabilisation in index derivatives and options volumes reflects "strategic recalibrations by market participants", ICRA said in a report.

Although margin trading facility (MTF) exposures have retracted closer to Rs 71,000 crore from their December 2024 peak, given their strong correlation with market trends, a resurgence in investor confidence could drive the trajectory back towards the Rs 1 lakh crore mark, the rating agency said.

The phased implementation of regulatory measures, beginning November 2024, led to a sharp contraction of trading activity in index options.

Between December 2024 and March 2025, the average daily premium turnover had declined by 18 per cent compared to the April-November 2024 period, while the number of options contracts traded fell by 60 per cent.

Moreover, order volumes, critical for F&O brokerage, were moderately impacted (down 25-35 per cent). However, despite this, rating agency noted that trading activity remains above historical levels.

In terms of financial performance, securities brokerage houses have observed the impact of reduced trading activity.

In Q4 FY2025, ICRA's sample of nine securities broking firms reported a 19 per cent year-on-year decrease in net revenue and a fall in profitability to 26 per cent, the lowest level in the past 12 quarters.

The report highlighted that " after three consecutive months of declining options volumes, trading activity appears to be stabilising, reflecting strategic recalibrations by market participants. The anticipated uptake of the MSEI-SX40 weekly index options could also help cushion the impact".

However, the rating agency warned that overall activity remains highly sensitive to future regulatory developments.

Adjustments in lot sizes and the rationalisation of weekly expiries have shifted trading towards longer-tenure contracts. These changes have notably reduced participation from smaller investors, Deep Inder Singh, Vice President and Sector Head Financial Sector Ratings, ICRA, said.

In March 2025, the number of investors with a monthly premium turnover below Rs 10,000 on the NSE dropped by 49 per cent YoY, while those in the Rs 10,000-Rs 1 lakh crore declined by 37 per cent. The investor count with higher monthly premium turnovers, was however less impacted, he added.

The move to a single weekly index derivative per exchange has also diversified market participation and is expected to foster healthier competition.

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