SEBI to Implement Structural Reforms in India's Derivatives Market

The Securities and Exchange Board of India (SEBI) has announced plans for comprehensive structural reforms in the country's derivatives market, aiming to curb unfair practices and enhance protections for small investors. This initiative follows recent regulatory actions, including the suspension of U.S.-based trading firm Jane Street for alleged market manipulation.

SEBI Chair Tuhin Kanta Pandey emphasized the necessity of these reforms, stating that despite previous measures to limit retail investor participation, trading volumes have not decreased to the desired extent, underscoring the need for deeper structural changes.

Background on India's Derivatives Market

India's derivatives market has experienced significant growth, becoming the world's largest by volume. However, this expansion has raised concerns about market integrity and investor protection. A SEBI study revealed that over 90% of individual participants in the derivatives market incur losses, with young traders influenced by inexpensive trading apps and online "finfluencers" engaging in high-risk activities.

Recent Regulatory Actions

On July 3, 2025, SEBI barred Jane Street from trading in the Indian market, alleging the firm manipulated stock indexes through derivatives trading. Jane Street reportedly made profits exceeding $4 billion over two years, with $567 million of alleged illegal gains placed in escrow. The firm has denied the allegations and is seeking additional time to respond to SEBI's interim order.

In addition to the suspension of Jane Street, SEBI has implemented measures to limit retail investor participation in the derivatives market, aiming to protect small investors from significant losses. Despite these efforts, trading volumes have not decreased to the desired extent, prompting the call for deeper structural reforms.

Proposed Structural Reforms

While specific details of the proposed reforms have not been fully disclosed, SEBI's recent actions and public statements indicate a clear intent to prioritize market stability and investor protection. Potential measures may include:

• Enhanced Surveillance: Strengthening real-time monitoring and reporting requirements for large proprietary and algorithmic traders to detect and prevent manipulative practices.

• Contract Size Adjustments: Increasing the minimum contract size in the derivatives market to reduce excessive speculation and ensure that participants have sufficient capital to absorb potential losses.

• Limiting Weekly Expiries: Restricting the number of weekly contract expiries to a single benchmark index to enhance market stability and reduce speculative trading.

Implications for Market Participants

The proposed reforms aim to create a more secure and balanced trading environment, particularly for retail investors who have been disproportionately affected by losses in the derivatives market. By curbing unfair practices and enhancing oversight, SEBI seeks to restore investor confidence and ensure the long-term stability of India's financial markets.

As SEBI moves forward with these structural reforms, the focus remains on balancing the rapid growth of India's derivatives market with the need for robust regulatory oversight to protect investors. The effectiveness of these measures will be closely monitored to assess their impact on market integrity and investor protection.