SEBI’s new proposals to rein in the frenzy in equity derivatives could reduce volumes by 30-40 per cent, impacting exchanges and retail-focused brokers the most.
The earnings impact may be higher for the National Stock Exchange (NSE) as the options segment accounts for about 60 per cent of its revenues, based on FY25 estimates. For BSE, the figure is 40 per cent.
“We estimate a 25-30 per cent impact on NSE’s FY26 earnings and 15-18 per cent for BSE. We don’t see any impact on MCX from these regulations. Following the revision, BSE’s earnings are likely to compound at 15 per cent CAGR over FY26-28. We assume the stock should bottom out at 30x FY26 revised EPS,” IIFL Securities said in a note.
Any earnings impact could affect NSE’s pricing power for its much-awaited IPO, said experts.
A key proposal is to restrict weekly options to one contract per exchange. For BSE, the majority of the notional turnover is concentrated on expiry days (96-97 per cent), whereas for Nifty and Bank Nifty it is 64 per cent and 62 per cent, respectively.
“BSE will have to drop one index, mostly Bankex. Its income from derivatives is comparatively lower than NSE, so it will be less impacted in absolute terms. Most of NSE’s transaction charges come from F&O whereas for BSE the figure is lower than 15 per cent,” said Deepak Jasani, Head - Retail Research, HDFC Securities.
Having said that, these measures will reduce BSE’s chances of narrowing the market share gap with NSE in derivatives, added Jasani.
NSE has four weekly index expiries and its biggest contract Bank Nifty contributes 50 per cent of its option premium volumes. IIFL reckons that the impact across -three weekly expiries — Bank Nifty, Fin Nifty and Nifty Mid-cap — will result in a 60 per cent impact on volumes. The overall impact on NSE’s full-year volumes could be 30-35 per cent, assuming one expiry and some increased traction in Nifty contract, the brokerage said.
The impact of BSE should be limited, given that it has only two contracts, of which Sensex contributed 85 per cent of the volumes in FY24. Assuming Bankex would have contributed 30 per cent by FY26, the impact is still lower compared to NSE. “With just 2 expiries now, BSE may see higher volume traction and faster market-share gains thereby further limiting volume impact. In the base case, we assume a 20 per cent hit on BSE volumes,” IIFL said.
BSE shares rallied 6 per cent on Wednesday to end at ₹2,559 apiece.
“For BSE, removal of Bankex weekly contracts can impact EPS by 7-9 per cent over FY25-27E. In our scenario analysis, gains from the spillover of trading activity from discontinued products can offset EPS impact and in the event of a moderate industry-wide impact of SEBI measures, can even drive EPS upgrades,” Jefferies said in a note.
Jefferies believes the proposed hike in margins near to expiry will reduce the leverage for option sellers and impact product profitability. “While larger institutional players may absorb the impact due to high leverage, HNI and retail individuals with low to nil leverage will see more impact and can reduce volumes in absence of additional margin money,” the broker said.
About 9.2 million individuals and proprietorship firms made a cumulative loss of ₹517 billion in FY24 and within them, only 15 per cent of traders made net profits. HFTs, algo-traders and FPIs, in general, made offsetting profits. The 3-4x hike in lot sizes in a phased manner over six months will lead to higher ticket sizes even on expiry days.
“While small retail (less than ₹10 lakh in monthly premiums) traders make up less than 3 per cent of system premiums, the overall impact from their reduced participation can be magnified as they may be contributing to the profit pool disproportionately,” Jefferies said.