India’s securities regulator is set to deliberate on a new regulatory framework that could fundamentally alter equity derivatives trading. According to sources, the Securities and Exchange Board of India (SEBI) may consider a proposal to link options-market leverage directly to corresponding positions in the cash equity segment, using a formula that ties exposure in both markets.
Under the proposed mechanism, the larger a trader’s underlying position in the cash market, the higher their leverage allowance in options would be — discouraging speculative bets with no market backing.
This aims to boost liquidity in the cash market while throttling unwarranted options activity.
Sources indicate that SEBI aims to achieve four key objectives through the proposal.
- Increase cash market liquidity
- Reduce Options liquidity
- Reduce excessive speculation and protect retail investors
- Cut down the ability of institutions like Jane Street to make fast money through manipulation
Sources told CNBC-TV18 that SEBI is also considering steps like facilitating short-selling in the cash equity market and enhancing the SLBM (stock lending and borrowing) system to raise deliverable volumes and liquidity in the cash market.
SEBI may consider discussing the proposal to link options leverage to the underlying cash position with its board. It will be crucial to see if the proposal finds a consensus or majority on the board.
On July 4, the SEBI barred Jane Street from buying and selling securities in the Indian market and also seized $567 million of its funds. Jane Street is reportedly planning to contest a finding by India’s financial regulator that the US trading firm engaged in manipulating the country’s markets, according to the company’s internal email seen by Reuters.
