India’s derivatives market has long been among the most active in the world. Over the past two years, however, the landscape has undergone rapid and consequential change. Record retail participation, a string of regulatory interventions, high-profile market-manipulation probes and an expanding interest-rate–derivatives ecosystem have together forced exchanges, clearinghouses and regulators to rethink market design, risk controls and participant access. The result is a market simultaneously more sophisticated and more tightly governed.
The market at a glance
India remains a global derivatives powerhouse particularly in exchange-traded equity derivatives. The National Stock Exchange continues to process enormous F&O volumes and option contracts, with India accounting for a very large share of global contracts traded. At the same time, recent months have seen a pullback in certain activity metrics as regulators tightened rules to curb speculative and high-frequency excesses. SEBI’s own monthly bulletins and exchange reports reflect both the long-term scale and the short-term re-pricing of activity.
Retailisation, rising losses and regulatory reaction
One of the defining shifts of the last three years has been the surge of retail participation in derivatives. While democratisation of access has benefits, it has also generated acute risk: SEBI-linked studies and media reporting indicate that retail investors’ net losses from derivative trading widened substantially in FY2024–25, totalling roughly ₹1.06 trillion, an increase of 41 percent year-on-year. This pattern prompted targeted regulatory measures to reduce excessive retail speculation in index options and other leveraged products.
SEBI’s response has been multifaceted: it introduced rules tightening contract expiry formats, reviewing lot sizes, strengthening position monitoring and formalising intraday position limits. The regulator’s September 2025 circular on intraday position limits is a direct attempt to curtail runaway intraday leverage and improve systemic surveillance. These measures aim to balance market integrity with access, but they have also lowered headline turnover in some derivative segments.
The Jane Street episode and market microstructure risks
A watershed episode that crystallised concerns about dominant liquidity providers involved the US trading firm Jane Street. SEBI’s investigation and subsequent action against the firm for alleged manipulation of index derivatives sent shockwaves across the ecosystem. The immediate market impact was stark: index options premium turnover plunge reports argue the exit of a large market maker removed substantial liquidity, producing a sharp fall in volumes and measurable changes in price discovery dynamics. Exchanges and regulators are now wrestling with how to preserve depth while preventing outsized influence from a small set of participants.
Clearing, central counterparty reforms and exchange accountability
The Clearing Corporation of India (CCIL) and exchange-based clearinghouses have been central in the market’s evolution. Post-incidents and in the wake of elevated volumes, clearing members and CCPs have enhanced margin methodologies, stress-testing protocols and settlement guarantees. The move by exchanges to bolster risk frameworks paired with legal and regulatory settlements signals an era where exchange governance and dispute resolution are as important as trading technology in sustaining investor confidence. Notably, the National Stock Exchange recently made provisions to settle regulatory cases, underlining the financial and reputational costs tied to market integrity issues.
Interest-rate derivatives and the growth of OTC infrastructure
While equity derivatives dominate public attention, India’s interest-rate derivatives market is quietly maturing. The CCIL-hosted ASTROID platform an anonymous dealing system for rupee OTC interest rate derivatives has expanded functionality in recent years, including trading referenced to MMIFOR benchmarks since March 2025. This development has improved transparency and onshore price discovery for swaps, OIS and other rupee-denominated instruments. Institutional participation by banks, NBFCs and select non-bank investors has broadened, helping deepen the yields curve and enabling more robust hedging of interest-rate exposures.
CCIL’s periodic research notes on derivatives corroborate an increasingly integrated picture: onshore interest-rate swap activity is rising, clearing mechanisms are evolving, and systemic infrastructures (including settlement and guaranteed settlement for IRS) are being scaled to accommodate longer tenors and larger notionals. These changes are pivotal for corporates and NBFCs seeking to manage duration and basis risks domestically rather than relying on offshore hedging.
Market structure: who provides liquidity, who bears the risk?
The Indian ecosystem now includes a complex mix of market makers, proprietary trading firms, foreign liquidity providers, mutual funds, HNI/retail traders and algorithmic players. The withdrawal or sanctioning of systemic liquidity providers exposes how concentrated market-making can be in certain option strikes and maturities. Regulators and exchanges are therefore rebalancing incentives through maker-taker fee structures, quoting obligations and enhanced surveillance to promote distributed liquidity while reducing manipulation vectors.
At the same time, the proliferation of algorithmic trading elevates speed, but it also complicates surveillance. SEBI’s enhanced reporting and intraday limit frameworks are attempts to manage this new reality by capturing activity patterns faster and imposing guardrails to avoid sudden flash events.
Investor implications: risk management and product design
For investors and risk managers, the market’s transition demands clearer playbooks. Retail participants must be better educated on the mechanics and asymmetric payoff of options. Institutional investors need stronger pre-trade risk controls, dynamic margining practices and scenario stress tests that account for sudden liquidity withdrawal. Product providers are likely to innovate more conservative derivative structures and managed solutions that offer hedging without exposing clients to leveraged adverse moves.
Policy takeaways and the way forward
The evolution of India’s derivatives market is a learning cycle: deep, liquid markets bring efficiency and hedging capability, but they also demand sophisticated oversight. Policymakers face the twin task of preserving market access and innovation while tightening resilience and fairness. Key priorities include:
- continuing enhancement of intraday surveillance and position transparency
- ensuring CCP robustness, standardized margining and cross-product stress testing.
- further development of notional tracking in OTC markets (ASTROID and CCIL enhancements)
- calibrated rules for liquidity providers that balance market depth with systemic safeguards.
- investor education and tighter onboarding norms for high-risk derivative participation.
India’s derivatives ecosystem is maturing through a necessary period of recalibration. The market remains among the world’s most active, especially on the exchange-traded equity side, but recent shocks and regulatory responses show that volume alone cannot be the only metric of success. Resilience, transparency and robust clearing are becoming the defining attributes of a healthy market. For traders, institutional investors and policymakers alike, the immediate task is clear: support market depth without compromising integrity and build the infrastructure and supervisory capabilities necessary for a complex, high-frequency, multi-product derivatives future.
