F&O trading to get costlier from April 1 as curbs on speculation kick in

Synopsis

Equity derivatives trading faces higher costs from April 1. New government taxes on futures and options will increase trading expenses. The Reserve Bank of India's stricter lending rules for brokers also take effect. These measures aim to moderate speculation. Trading volumes are expected to decrease, particularly for retail traders. Costs for trading, arbitrage, and hedging will rise.

Mumbai: Trading in equity derivatives is set to become more expensive from April 1, as a set of measures by the government and the central bank aimed at moderating speculation are set to kick in. The steps - including higher taxes on futures and options trading and tighter lending norms for brokers - will raise trading costs and squeeze volumes.

The government, in its Budget 2026-27, has raised the securities transaction tax (STT) on futures to 0.05% from 0.02%, a 150% increase. On options, STT on premiums and exercise of options will both rise to 0.15% from 0.10% and 0.125%.

RBI's tighter lending norms for capital market intermediaries, including brokers, requiring all credit facilities to be fully secured with 100% collateral, will also take effect on Wednesday.

"While the STT hike and stricter RBI lending norms aim to curb speculative intensity, such a broad-based approach inevitably raises entry barriers and increases friction across the entire ecosystem," said Ankur Jhaveri, MD & CEO - Institutional Equities, JM Financial Institutional Securities.

Volumes in equity derivatives could drop 15-20%, increasing impact costs in the cash market, according to him.

Brokers collect STT from clients soon after the trade, making it an upfront cost for traders, regardless of the profit or losses.

"We expect the biggest impact to be on retail traders following the STT hikes," said Dhiraj Relli, managing director and chief executive officer at HDFC Securities. "Derivatives volumes could drop around 20% for retail participants, and closer to 30% when you include proprietary traders."

The futures segment is likely to see sharper cuts in trading activity compared to options on account of the STT increase, said brokers. This tax on futures trade is levied on the transaction value, increasing the outgo.

"The higher tax is expected to increase trading, arbitrage and hedging costs which may impact to the overall cost and liquity in derivatives," said Roop Bhootra, whole-time director, Anand Rathi Share and Stock Brokers.

Prop Traders
RBI's tighter norms are aimed at bringing down banks' loans to brokers and proprietary traders, increasing their cost of capital. Proprietary trading desks rely heavily on bank-backed funding and guarantees to take higher trading exposures.

“RBI regulations will reduce leverage for proprietary traders, who will now need 100% collateral for bank guarantees, and raise the cost of capital for brokers due to full cash margin requirements for intraday funding,” said Bhootra. Local proprietary and highfrequency trading firms — key contributors to market volumes — face the highest direct impact, said Jhaveri. For these traders, higher STT and reduced leverage are a double whammy, according to Relli. “This could reduce volatility on expiry days when such players are typically most active,” he said

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