SEBI Panel Recommends Measures To Curb Excessive Speculation in Derivatives Market: Report

Moneylife Digital Team 09 July 2024

Investor Interest

The Securities and Exchange Board of India (SEBI) is taking steps to address the growing concern of excessive speculation in the derivatives market, driven by high retail participation in recent years. Last month, SEBI appointed an expert working committee to tackle this issue and the panel has now put forth several recommendations aimed at curbing the unbridled rise in derivatives volume.

According to a report from Moneycontrol.com, the following key recommendations were suggested by the expert committee:

1. Increase in Minimum Lot Size: The working committee on futures & options (F&O) has suggested raising the minimum lot size of derivative contracts from the current Rs5 lakh to Rs20 lakh-Rs30 lakh. This significant increase is expected to make derivatives trading less accessible to small-ticket traders.

2. Restriction on Weekly Options: The panel recommends limiting weekly options to only one expiry per stock exchange per week which would narrow the playing field for traders.

3. Limiting Strike Prices: A proposal to reduce the number of strike prices for options contracts has been made.

4. Additional Measures: Other suggestions include upfront collection of option premiums from buyers, intra-day monitoring of position limits, and further increasing margin requirements as expiry approaches.

The secondary market advisory committee will review these recommendations before a final decision is made.

The derivatives market in India has seen explosive growth, with overall derivative turnover jumping from Rs210trn (trillion) in FY17-18 to Rs500trn in FY23-24. Retail participation has surged, with individual investors in index options increasing from 2% in FY19-18 to 41% in FY23-24.

While SEBI chairperson Madhabi Puri Buch has stated that this growth doesn't pose systemic risks due to robust margining systems, there are significant social concerns. Anecdotal evidence suggests many individuals borrow money to trade options with hopes of quick profits, despite a SEBI study showing that nearly 90% of retail traders lose money on options bets.

Market veterans have criticised weekly contracts, arguing they serve no economic benefit and are used primarily for speculation rather than their intended purpose of hedging.

SEBI appears open to taking strong measures, if necessary. Chairperson Buch has indicated that the regulator would be willing to remove certain derivative products if recommended by the working committee and supported by data-driven logic.

Comments

User

dayaka58

8 months ago

First daily expiry of weekly contracts should be stopped. Which allows the highnetworth individuals fiis diis to manage the Index at the cost of small investors. By raising the limit you are curbing the counterparties from participation. Which may lead to tug of war between money powers and it may cost the market dearly and capital markets main objective of capital formation and investments may be derailed. Punish the violators exemplory including brokers particularly with big houses backing. And do not harass genuine participants in the name of prevention. Prevention may be worst than decease.

parimalshah1

8 months ago

If F & O is mainly for hedging by institutional players only, the lot size has to be worth at least a crore. This will automatically exclude small punters and retailers.

balakrishnanr

8 months ago

one only hopes that SEBI does this ASAP. Listing the exchanges is the worst thing we have done. They have driven this in search of more and more income.