Is there a way to restrict users shown on the Watchers system field and in Assignee field in search screen (in filters). Please guide me how this could be setup?
there is a permission in the permission scheme to "View Voters and Watchers", if that is what you are looking for. Only users/groups/roles configured to have this permission can see the users in the Watchers field.
If your question is more like "Can i prevent certain users to show in the Watchers field" - i dont know a way to do that.
I dont know of a way to restrict the visibility of the assignee apart from restricting access to the whole issue.
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