Derivatives Regulation & Market Modernization: SEBI’s Strategy Unveiled

SEBI Tightens Derivatives Oversight, Aligns with RBI to Curb Retail Speculation and Deepen Cash Markets​

India’s market regulator is intensifying its efforts to rein in speculative activity in the derivatives segment, particularly among retail investors, as part of a broader push to strengthen market stability and improve long term capital formation.

The Indian government and the Securities and Exchange Board of India are aligned on raising transaction tax on equity futures and restricting the number of weekly expiry contracts offered by exchanges. The objective is clear: reduce excessive short term speculation in derivatives.

Data Driven Derivatives Reforms Since 2024​

The initiative began in 2024 and has since evolved into a structured regulatory framework. According to SEBI Chairman Tuhin Kanta Pandey, the regulator has introduced multiple measures in consultation with industry stakeholders.

These include tighter risk metrics, position limits, upfront payments, and higher expiry day margins. The measures have been rolled out in phases, with the most recent implementation taking place in December.

Pandey emphasized that SEBI will continue monitoring market data and is prepared to introduce further steps if required. The regulator is following a calibrated and evidence based approach, rather than a blanket clampdown.

Importantly, SEBI’s aim is not to eliminate derivatives trading. Instead, it seeks to encourage a transition toward longer term contracts that provide more meaningful hedging and price discovery. The regulator remains open to refining norms if market data indicates a need for adjustments.

Focus Shifts to Strengthening Cash Equity Markets​

While derivatives face tighter scrutiny, SEBI is simultaneously examining ways to deepen the cash equity market.

A working group has been formed to review the short selling and Securities Lending and Borrowing Mechanism framework. The goal is to improve liquidity in cash markets and address structural barriers that have limited participation in these segments.

Pandey acknowledged that certain impediments have prevented short selling and securities lending from gaining traction. Removing these obstacles is now a regulatory priority.

SEBI and RBI Move in Sync on Proprietary Trading​

SEBI’s approach also aligns with the recent rules introduced by the Reserve Bank of India, which restrict bank exposure to brokers engaged in proprietary trading.

The RBI guidelines effectively impose a near total ban on funding proprietary trades. While market intermediaries have sought relaxation, Pandey said the arguments presented have not been persuasive. He noted that the RBI had earlier issued guidelines and sought comments on the issues raised.

This coordination between SEBI and the RBI reflects a broader regulatory intent to contain leverage and reduce systemic risks stemming from speculative trading.

Push to Develop Commodity Derivatives Market​

As part of a wider stability strategy, SEBI is also working with the RBI to expand India’s commodity derivatives market.

The regulator has proposed allowing banks and insurance companies to participate in commodity derivatives trading, subject to safeguards such as position limits and margin requirements. While the proposal has been put forward, the RBI has yet to respond.

SEBI currently has two working groups focused on commodity market development. Pandey noted that the commodity derivatives market, both agricultural and non agricultural, has not been proactively developed for a long time, despite its potential.

The regulator’s approach balances participation with prudential guardrails rather than opting for outright prohibitions.

Making India More FPI Friendly​

Even as Foreign Portfolio Investors remain net sellers in Indian equities, SEBI is focusing on operational reforms to make India more accessible and efficient for global capital.

Pandey said capital flows depend on multiple global factors, some beyond SEBI’s control. However, the regulator is addressing areas within its remit.

A major initiative is to reduce the time taken for an FPI to move from registration to investing in Indian equities to just five days. SEBI is also reducing compliance burdens, streamlining processes, and accelerating digitisation.

Legacy requirements such as physical documentation and notarisation are being removed. Repeated document submissions are being rationalised, and India Digital Signatures are being integrated into the registration process to eliminate procedural delays.

Modernising Block Deals and Settlement Cycles​

SEBI is also modernising existing frameworks, including the Block Deal Framework, which was considered outdated and insufficiently flexible for current market realities.

A consultation paper has been issued on implementing FPI netting, which is expected to improve fund efficiency to T+1. The regulator has ensured that FPIs can move funds on the T+1 settlement day without additional delays.

A Broader Market Stability Strategy​

The overall regulatory direction is consistent and coordinated. SEBI is tightening speculative derivatives activity, aligning with the RBI on risk containment, developing underutilised markets such as commodities, and simultaneously improving ease of doing business for foreign investors.

The strategy aims to create a more stable, predictable, and efficient market structure, while nudging domestic participation toward longer term and less volatile segments.