The Working Committee on Futures and Options has recommended significant changes to India’s derivative trading regulations. Among the key proposals are increasing the minimum lot size of derivative contracts from the current Rs 5 lakh to Rs 20 lakh-Rs 30 lakh, restricting weekly options to one expiry per stock exchange per week, and limiting the number of strike prices for options contracts. SEBI’s new derivative rules will aim to curb the rapid rise in derivatives volume, sources told Moneycontrol.
Background and Rationale
Capital market regulator SEBI appointed this expert working committee last month to address concerns over excessive speculation driven by high retail participation in recent years.
SEBI’s New Derivative Rules: Key Recommendations
- Increase in Contract Size: The proposal to raise the contract size will likely make derivative trading unaffordable for small-ticket traders, effectively reducing retail participation.
- Limit on Weekly Expiries: By restricting weekly options to one expiry per week per stock exchange, the measure aims to narrow the playing field for traders.
- Other Measures:
- Fewer strike prices
- Upfront collection of option premiums from buyers
- Intra-day monitoring of position limits
- Increased margin requirements closer to expiry
These recommendations will be reviewed by the Secondary Market Advisory Committee before a final decision is made.
Concerns and Implications
The surge in derivatives trading volume in India has raised alarms. While the SEBI Chairperson assured that the rise does not pose a systemic risk due to the robust margining system, the social repercussions are troubling. Anecdotal evidence suggests many individuals are borrowing money to trade options, despite a SEBI study revealing that nearly 90% of retail traders lose money on options bets.
Market experts argue that most weekly contracts are used for speculation rather than their intended purpose of hedging. SEBI data underscores the dramatic increase in derivative turnover, jumping from Rs 210 trillion in FY18 to Rs 500 trillion in FY24. Retail investor participation in the F&O segment surged by over 40%, from 65 lakh in FY23 to 96 lakh in FY24. The proportion of individual investors in index options soared from 2% in FY18 to 41% in FY24.
Conclusion
The proposed changes by SEBI’s expert committee are poised to significantly impact retail investors and the overall derivative trading landscape. By tightening regulations, SEBI aims to mitigate the risks associated with excessive speculation and ensure a more stable and secure market environment.
