The Securities and Exchange Board of India (Sebi) is looking at increasing the minimum value of each Futures and Options (F&O) contract from Rs 5 lakh to Rs 25 lakh. This move aims to reduce speculative trading and protect retail investors.
Expert Committee Recommendations
An expert committee on derivatives, formed by Sebi, is closely examining data on the F&O segment. The committee’s initial recommendations focus on curbing speculative trading. These suggestions include raising the contract value, which the Secondary Market Advisory Committee has endorsed.
New Consultation Paper
Sebi plans to issue a consultation paper soon, starting a two-phase tightening of norms for the equity F&O segment due to concerns over increased speculation and retail investor losses. The first phase will involve consultations with market participants.
Rising Speculation in F&O
Initially intended to help investors hedge risks, the F&O segment has seen a significant rise in speculative trading. Sebi’s concerns grew after a January 2023 report highlighted a substantial increase in individual traders and their losses. In FY22, over 45 lakh traders participated in the equity F&O segment, up from 7 lakh in FY19. Nine out of 10 traders incurred average losses of Rs 1.1 lakh.
Increased Trading Volumes
Trading volumes have continued to grow. In May 2024, the equity derivatives segments of the BSE and NSE reported an aggregate turnover of Rs 9,504 lakh crore, a 71% increase over May 2023.
The first phase of proposals includes weekly expiry of contracts and higher margin requirements for investors. Additional recommendations from the expert panel are expected soon and may be implemented later.
Challenges in Implementing Norms
There have been suggestions to introduce product suitability norms, like those in other countries, which impose criteria such as the wealth or education of the investor. However, implementing such norms in India might be challenging.
Recent Meetings and Discussions
A working group led by former RBI executive director G. Padmanabhan has discussed various proposals, including limiting weekly options, increasing lot sizes of F&O contracts, enhancing margin requirements, upfront collection of option premium from buyers, and intra-day monitoring of position limits.
Sebi Chairperson’s Concerns
Sebi chairperson Madhabi Puri Buch has noted anecdotal evidence of people borrowing money to place speculative bets in the derivatives segment, which is concerning given that household savings are going into such risky bets. The regulator has also observed a spike in option volume near the expiry of weekly contracts. Currently, all five working days have at least one expiry of NSE or BSE indices.
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