Markets regulator Securities and Exchange Board India (Sebi) is likely to consider increasing the minimum value of each F&O contract from Rs 5 lakh to Rs 25 lakh as part of its strategy to curb speculative trading to protect the retail investors.
The agenda is a part of preliminary recommendations by an expert committee on derivatives segments constituted by the markets regulator.
The expert committee is currently examining data on the futures and options (F&O) segment closely, a Times of India report said, adding that the committee’s preliminary recommendations are aimed at curbing speculative trading.
Increasing the minimum value of each F&O contract from Rs 5 lakh to Rs 25 is one of the measures the committee is mulling over, this report said, citing its sources.
“Its initial recommendations focused on a seven-pronged assault to check speculation have been endorsed by the secondary market advisory committee, comprising experts and key market participants, and the regulator is expected to issue a consultation paper in the next few days,” one of the sources revealed to TOI.
Sebi is planning a two-stage tightening of norms for the equity F&O segment due to concerns over increased speculation and retail investor losses, this report said, adding that the consultations with market participants for the initial phase are about to start.
While initially intended to help investors hedge risks, the growing scale of speculation in F&O has raised alarms among Sebi and government officials.
Sebi’s concerns about the rising F&O volumes were first highlighted in a report in January 2023 and the report noted a significant increase in individual traders in the equity F&O segment, with over 45 lakh traders in FY22 compared to 7 lakh in FY19. It also revealed that nine out of 10 individual traders incurred losses, averaging Rs 1.1 lakh during FY22. Almost 90% of active traders saw average losses of Rs 1.25 lakh during this period.
Since then, volumes have only grown with the aggregate turnover in the equity derivatives segments of the BSE and the NSE in May reported at Rs 9,504 lakh crore, translating into a 71% rise over May 2023.
Other suggestions for the first phase include proposals for weekly expiry of contracts and higher margin requirements for investors. Additional recommendations from the expert panel are expected in the coming weeks and may be implemented later.
There have been suggestions to introduce product suitability norms, similar to those in some other countries, which impose criteria such as the wealth or education of the investor. However, implementing such norms in India might prove challenging, the report mentioned.
Earlier, ET had reported about this committee and that it would meet on July 15 to discuss short-term measures for the F&O segment. It also said that a working group headed 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 of options, and intra-day monitoring of position limits.
Sebi chairperson Madhabi Puri Buch recently said the capital markets regulator has anecdotal evidence of people borrowing money to place speculative bets in the derivatives segment and lamented that household savings were going into such risky bets.
The regulator has also noted that option volume spurts near the expiry of the weekly contracts. Currently, all five working days of a week have at least one expiry of NSE or BSE indices.
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