Indian regulators plan panel to weigh derivatives risk, sources say

India’s top financial regulators will form a committee to assess stability risks emerging from a surge in derivatives markets and suggest policy changes if required, two sources familiar with the matter said.

Options trading in India has soared in the last five years, fuelled mainly by retail investors. The notional value of index options traded more than doubled in 2023-24 to $907.09 trillion from $447.69 trillion a year ago, exchange operator NSE says.

The panel will be set up by the Financial Stability Development Council, which includes the finance minister, the central bank governor and the market regulator, the sources said.

Its members and reporting timeline will be finalised in coming months, added the sources, who spoke on condition of anonymity, as they were not authorised to speak to media.

The plan to set up a panel has not been previously reported.

India’s finance ministry, the central bank, the Reserve Bank of India and the regulator, the Securities and Exchange Board of India, did not immediately respond to queries about the plan. The committee will assess potential systemic risks emerging from the surge in derivatives trading, the need for investor protection measures and for increased regulatory monitoring, the two sources said. It will also check for a correlation between the rise in small unsecured loans and options trading, said one of the two sources.

“Checks would be made on end-use of funds lent by non-banking finance companies which have a broking arm and whether those funds led to capital market exposure,” the source added.

Personal loans, whose end use is not monitored by banks, have been growing at a rapid clip of more than 20% a year, central bank data shows.

The ratio of the notional value of derivatives traded in India to more traditional cash trading is 422 times, the world’s highest, Axis Mutual Fund said in an October 2023 report.

In most markets, derivatives volumes now account for 5 to 15 times cash market volumes, it added.

“Even in terms of premium turnover to cash ratio, India is an outlier and is higher than most other global economies,” said Ashish Gupta, the fund’s chief investment officer.

Premium turnover is the market value of a contract or the price at which the contract is bought or sold and is typically lower than notional volume, the total value of the contract.