Brokers Urge SEBI to Revive Bank Nifty Weekly Options: Will Trading Surge Back?

The Association of National Exchanges Members of India (ANMI), representing the country's stockbrokers, has formally requested the Securities and Exchange Board of India (SEBI) to permit the National Stock Exchange (NSE) to reinstate weekly options trading for the Bank Nifty index. This move comes after SEBI's directive in October 2023 to limit weekly options to a single contract per benchmark index.

Background to the Restriction

• In response to concerns over increasing losses faced by retail investors in equity options trading, SEBI mandated exchanges to offer only one weekly options contract on benchmark indices.
• This led the NSE to discontinue multiple weekly options contracts for Bank Nifty starting November 2024.

ANMI's Plea

• The association argues that the restriction has severely impacted market activity.
• In a letter to SEBI, ANMI highlighted that premiums from weekly options on Bank Nifty constituted approximately 74% of the total premiums in Bank Nifty options during the first half of FY25.
• Their re-introduction is seen as crucial for reviving trading volumes and associated revenues.

Impact on NSE Volumes and Revenue

• The discontinuation of multiple weekly Bank Nifty options contracts has resulted in a steep decline in trading volumes on the NSE.
• This directly affects the bourse's revenue streams.
• ANMI noted that prior to the restriction, index-derivative premium turnover saw a drop of about 35-40% after November 2024.

Consequences for Brokerages and Government Revenue

• The reduced trading activity has led to job losses within brokerage firms, affecting roles such as dealers, salespersons, and back-office staff, which are linked to high-turnover contracts.
• Furthermore, the contraction in turnover translates to a substantial reduction in government revenue from Securities Transaction Tax (STT) and Goods and Services Tax (GST) levied on brokerage and related financial transactions.
• ANMI estimates that government revenue from ancillary services connected to this trading has been adversely affected.

Impact

• The re-launch of Bank Nifty weekly options could significantly boost trading volumes on the NSE, potentially leading to increased revenue for the exchange.
• Brokerages might see a recovery in business, potentially reversing recent job losses and creating new opportunities.
• Government revenue from STT and GST related to options trading could see a substantial increase if volumes rebound.
• Retail investors might regain access to a popular trading instrument, though SEBI's earlier concerns about investor losses will likely remain a point of consideration.
• Impact Rating: 8/10

Difficult Terms Explained

• ANMI (Association of National Exchanges Members of India): A prominent association representing stockbrokers across India's national stock exchanges.
• SEBI (Securities and Exchange Board of India): The primary regulator of the securities market in India.
• NSE (National Stock Exchange of India): One of the leading stock exchanges in India.
• Bank Nifty: A stock market index representing the banking sector listed on the National Stock Exchange of India.
• Weekly Options Contracts: Financial derivatives that give the buyer the right, but not the obligation, to buy or sell an underlying asset (in this case, the Bank Nifty index) at a specified price on or before a specific date, which expires at the end of the week.
• Retail Investors: Individual investors who purchase securities or invest in products for their own accounts, rather than for an institution.
• Securities Transaction Tax (STT): A direct tax levied on transactions of securities (shares, derivatives, etc.) when they are traded on a stock exchange.
• Goods and Services Tax (GST): A comprehensive indirect tax levied on the supply of goods and services in India.
• Bourse: A stock exchange.
• Premium: In options trading, the price paid by the buyer to the seller for the rights granted by the option contract.
• Index Derivative: A financial contract whose value is derived from the performance of an underlying stock market index.