Securities and Exchange Board of India’s Chairman Tuhin Kanta Pandey recent statement that the regulator would engage with market participants to understand “what is holding them back” from introducing longer-duration products and assess whether any issues need to be addressed has started a new debate.
To be sure, Indian stock exchanges currently offer derivatives contracts with weekly and monthly expiries. And even the exchanges believe that longer-term term contract are needed.
Sundararaman Ramamurthy, MD and CEO, BSE, has supported the introduction of longer-term derivatives. “A longer-term approach in derivatives is important. Longer expiry contracts can allow investors’ views and strategies to play out over time at a lower cost,” he told FE recently.
He added that such products could diversify participation by attracting larger investors, bringing greater stability not only to the derivatives market but also to the underlying market.
However, experts said the biggest challenge in introducing longer-tenure derivatives may not be regulation but the market’s ability to support them. Legal and market experts pointed to liquidity concerns, retail investor preferences and product design challenges as key hurdles.
“The conversation around longer-tenure derivatives is not really about regulation; it is about liquidity,” said Ketan Mukhija, partner and co-head of private equity and venture capital at Kochhar & Co. “Sebi has made it clear that there is no regulatory prohibition on launching such products, and the real challenge is whether exchanges can attract sufficient participation to create a liquid market.”
Liquidity fragmentation remains a major concern. According to Nirali Mehta, partner at Mindspright Legal, the introduction of multiple expiry dates could result in trading activity staying concentrated in near-term contracts, while longer-duration products may see limited participation.
This could lead to wider bid-ask spreads and weaker price discovery, increasing risks for traders, she said.
The dominance of short-dated options in India’s derivatives market could also pose a challenge. Retail investors have gravitated towards weekly options due to their relatively low cost and high leverage, making it uncertain whether they would shift to longer-duration products.
“Institutional investors are savvy and can adapt to new products quickly. They would welcome the introduction of such contracts, particularly from a hedging perspective,” said Pulkit Sukhramani, partner at JSA Advocates & Solicitors.
“However, retail investors are attracted to low-cost, high-leverage weekly options. Aligning retail participation with longer-duration contracts will be a separate challenge for Sebi and market participants.”
Longer-tenure contracts also require greater capital commitment. Mehta noted that these products typically involve higher premiums and greater uncertainty due to their extended exposure period, which could discourage retail investors and short-term traders, further affecting liquidity.
While some market participants have questioned whether the existing framework is suitable for such products, experts believe the regulatory architecture already allows room for innovation.
“Sebi can approve new products under the existing regulatory framework,” Sukhramani said. The bigger challenge, he added, would be ensuring transparent pricing, maintaining market integrity and protecting investor interests.
Mehta, however, said risk management and surveillance systems may need to evolve to address the specific risks associated with longer-tenure contracts, including the possibility of manipulation and the need for enhanced monitoring.
Concerns around speculative trading, which have been a key focus area for the regulator in recent years, may also be lower compared with shorter-dated contracts.
“Structuring of the product will determine the impact of speculative trading,” Sukhramani said. Any derivative contract with adequate liquidity can encourage speculation. Longer-term contracts, he added, are better suited for institutional investors seeking to hedge and manage long-term positions.
Mehta also said longer-tenure derivatives are more likely to be used by sophisticated investors for hedging and portfolio management rather than speculation.
Industry participants believe that if liquidity can be developed, such products could find demand among institutional investors, corporates and other sophisticated market participants seeking long-term risk-management tools.
However, their success will depend less on regulatory approval and more on whether exchanges can build sufficient demand to sustain these contracts.
