RBI's New Margin Funding Norms Could Reduce Options Trading Volumes by Up to 20 percent FY28: Report

India's leading stock exchanges are expected to continue benefiting from healthy operating leverage and a broader mix of revenue sources. However, fresh regulations introduced by the Reserve Bank of India (RBI) on margin funding could put pressure on trading activity in the derivatives market, particularly options, according to a report by Dolat Capital.

The brokerage noted that exchanges have posted robust earnings growth in recent years, largely fueled by a surge in index options trading. Beyond trading fees, exchanges have also strengthened their financial performance by expanding into businesses such as clearing services, colocation facilities, and mutual fund transaction platforms, reducing their dependence on a single revenue stream.

Despite these positives, the report cautioned that the RBI's latest rules limiting the use of bank guarantees (BGs) for leveraged positions may affect proprietary trading firms. These firms, including many high-frequency trading (HFT) participants, often rely on low-cost funding through bank guarantees. With the new restrictions in place, they may have to turn to commercial papers (CPs), which carry funding costs of roughly 11%, compared with nearly 1% for bank guarantees. The higher borrowing cost could make several trading strategies less attractive and reduce market participation.

Dolat Capital said it expects trading volumes across exchanges to come under pressure, depending on the proportion of proprietary trading and the exchanges' reliance on funding backed by bank guarantees. At the National Stock Exchange (NSE), proprietary traders contribute more than 45% of index options volumes, a segment that generates about 53% of the exchange's total revenue. They also account for nearly 28% of stock futures trading.

Taking the regulatory changes into account, the brokerage has revised its projections, estimating that average daily turnover (ADTO) in options could decline by around 8% in FY27 and as much as 18% in FY28 compared with its earlier forecasts. Futures trading volumes are also expected to soften, with projected declines of 3% in FY27 and 6% in FY28.

The report also highlighted the potential impact on the Bombay Stock Exchange (BSE), where proprietary traders and HFT firms contribute over half of index options trading activity. Since index options account for nearly 60% of BSE's revenue, Dolat Capital expects ADTO in this segment to fall by approximately 10% in FY27 and up to 20% in FY28 from its base-case estimates. While India's stock exchanges remain fundamentally strong with diversified revenue streams, the report suggests that tighter RBI regulations on leverage could temper derivatives trading volumes over the next two financial years.