July 9, 2024
New Delhi, India
In a significant move aimed at curbing excessive speculation in the derivatives market, the Securities and Exchange Board of India (SEBI) has proposed new measures that could reshape the landscape of futures and options (F&O) trading. An expert committee appointed by SEBI has recommended increasing the minimum lot size for derivative contracts and limiting weekly options to a single expiry per stock exchange. These recommendations come in response to the growing concern over high retail participation and the associated risks. Here’s a closer look at the proposed changes and their potential impact on the market.
Key Recommendations by SEBI’s Expert Committee on F&O Trading
Raising Minimum Lot Size
- Current Lot Size: Rs 5 lakh
- Proposed Lot Size: Rs 20-30 lakh
- Objective: To reduce excessive speculation by making it less accessible to small-ticket traders.
Limiting Weekly Options
- Current Practice: Multiple weekly expiries
- Proposed Change: Restrict to a single expiry per stock exchange each week.
- Objective: To control the rapid increase in derivatives volume and narrow the field for traders.
Additional Measures
- Rationalisation of Strike Prices: To limit the number of strike prices available for options contracts.
- Upfront Collection of Option Premiums: Buyers of options to pay premiums upfront.
- Intra-day Monitoring of Position Limits: To ensure traders do not exceed their position limits during the trading day.
- Increasing Margin Requirements: Higher margins closer to contract expiry to manage risks.
- Removal of Calendar Spread Benefits: To eliminate benefits on the expiry day.
Regulatory Concerns and Objectives
Addressing Excessive Speculation
- High Retail Participation: Recent years have seen a surge in retail investors participating in F&O trading, often without adequate risk management.
- Regulatory Scrutiny: SEBI and the Reserve Bank of India have expressed concerns about the risks associated with retail investors engaging in speculative derivatives trading.
Protecting Small Investors
- Expert Group Discussions: SEBI’s expert group is evaluating seven proposals aimed at enhancing investor protection and improving risk management in the derivatives market.
- Impact on Retail Investors: Measures such as increasing the lot size and limiting weekly options are designed to protect small investors from significant financial losses.
Market Implications
Potential Impact on Derivatives Volume
- Higher Contract Size: Making derivative contracts less affordable for small traders could lead to a reduction in trading volumes.
- Limited Weekly Expiries: Restricting the number of weekly expiries could also decrease trading activity, particularly among retail investors who favor short-term trades.
Next Steps
Review and Implementation
- Secondary Market Advisory Committee: The recommendations by the expert panel will be reviewed by SEBI’s Secondary Market Advisory Committee before a final decision is made.
- Stakeholder Feedback: SEBI is likely to consider feedback from various market participants before implementing the proposed changes.
These recommendations by SEBI’s expert committee aim to curb excessive speculation and enhance investor protection in the F&O trading segment. The proposed measures, if implemented, could significantly impact trading volumes and the participation of retail investors in the derivatives market.
Source: Moneycontrol
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