Persisting retail F&O losses spur call for tighter eligibility filters

Nearly two years after the Securities and Exchange Board of India (SEBI) launched a series of measures to curb excessive retail speculation in the derivatives market, industry participants are increasingly backing tighter eligibility and suitability norms for futures and options (F&O) trading, arguing that participation has fallen but trading behaviour remains largely unchanged.

The latest data have revived call for stricter entry norms in derivatives trading, with industry participants advocating measures such as income thresholds, investor qualification tests and accredited investor status. The view is that suitability checks and investor profiling may be more effective in protecting retail investors and improving market stability than product-level restrictions alone.

Dhiraj Relli, Managing Director and Chief Executive Officer of HDFC Securities, said, “There is a need for some more stringent suitability exercises. I am an advocate of suitability.” He added, there has been some success from the regulatory interventions but more safeguards are required.

Key finding

The trigger for the debate is SEBI’s latest findings that showed while the number of individual traders fell for the first time in nine years after regulatory intervention, trading behaviour changed little. Nearly 97 per cent of retail activity remained concentrated in contracts with less than a week to expiry, while 87.7 per cent of individual traders ended FY26 with losses. The average loss per trader also rose over 2 per cent to ₹1.16 lakh.

A key finding has been that derivatives traders with larger underlying equity portfolios tend to fare better than those with little or no cash-equity exposure, strengthening the argument for suitability-based access.

“I think the debate on the derivatives framework should continue. SEBI has already taken a number of significant measures, and it is appropriate to assess their impact. At the same time, this market has evolved very rapidly, and the regulatory framework will necessarily need to evolve with it,” said Ananth Narayan, former SEBI whole-time member.

The suitability issue is increasingly gaining traction among market intermediaries. “How do we ensure, in a practical and proportionate way, that individuals taking leveraged risks understand those risks and have the financial capacity to bear potential losses? This deserves continued debate. The challenge is to improve investor protection without creating arbitrary barriers to participation,” Narayan said.

SEBI is still grappling with the concerns that prompted its intervention in October 2024, namely heavy retail losses, extremely high volumes in index options on expiry day and the overwhelming preference for ultra-short-term trading strategies.

Balancing act

At the same time, regulators face a delicate balancing act. A significant portion of revenues earned by exchanges, clearing corporations, brokers and other intermediaries is linked to derivatives trading activity.

“A substantial part of the revenues of exchanges, clearing corporations, brokers and other intermediaries is linked to derivatives activity. Sharp changes can therefore have consequences for liquidity, market-making and the broader market ecosystem. Necessary regulatory action should not be avoided for that reason, but the consequences need to be understood and changes undertaken in a calibrated manner,” Narayan said.

Another challenge is the concentration of trading activity around expiry day. Unlike more developed markets where a substantial share of open interest is either closed or rolled forward before settlement, India’s derivatives market continues to see intense activity centred on expiry sessions.

“There is merit, therefore, in developing greater liquidity in the underlying cash market, including through the continued development of the Securities Lending and Borrowing Mechanism (SLBM), while also encouraging greater liquidity across longer-tenor derivative contracts,” Narayan said. “The objective should not be to suppress derivatives activity, but to ensure that the cash and derivatives markets develop in a balanced manner, across maturities,” he said.

Ashish Nanda, Chief Digital Business Officer at Kotak Securities, said the detailed data could also encourage behavioural changes among retail participants. “A push towards the cash-market will also help retail investors create a portfolio with a long-term perspective,” he said.

Published on August 25, 2026