Tightening the noose on speculative trading, the Securities and Exchange Board of India (Sebi) has introduced a stricter framework for futures and options (F&O) trading effort in an effort to curb losses for retail investors. The latest rules include increasing the minimum contract size and mandating upfront collection of option premiums.
Why Has Sebi Introduced Tighter Rules for F&O Market?
The markets regulator in a recent study said 93 per cent traders in the F&O contracts loses money. It also said that over 75 per cent of those who have lost their money in F&O trading had an annual income of less than Rs 5 lakh. The study also highlighted that the percentage of loss-making traders increased from 89 per cent in FY22.
The Economic Survey 2023-24 said, “Derivatives trading holds the potential for outsized gains. Thus, it caters to humans’ gambling instincts and can augment income if profitable. These condiderations are likely driving active retail participation in derivative trading. However, globally, derivates trading loses money for the investors, for the most part.”
Recently, various chartered accountants (CAs) also shared instances of people losing their money more than their annual income.
What the Latest Sebi Measures?
Contract Size Increased: The Sebi in its circular issued on October 1 has increased the minimum contract size for index derivatives to Rs 15-20 lakh, as compared with Rs 5-10 lakh earlier, which was last set in 2015. This was aimed at better aligning with market growth.
“It has been decided that a derivative contract shall have a value not less than Rs 15 lakh at the time of its introduction in the market. Further, the lot size shall be fixed in such a manner that the contract value of the derivative on the day of review is within Rs 15 lakh to Rs 20 lakh,” Sebi said.
One Weekly Expiry: The markets regulator has said exchanges can offer weekly expiry derivatives only for one benchmark index to curb speculative trading.
Additional Margin: The Sebi has said an additional 2 per cent margin (ELM) will be levied on short options contracts on the day of expiry to address speculative risks. This adjustment, effective from November 20, ensures that the higher leverage and risks in derivatives align with market growth and maintain suitability for participants.
Full Premium Upfront: The markets regulator said option buyers will need to pay the full premium upfront to avoid excessive leverage, besides benefit of offsetting positions across different expiries will not be allowed on the day of expiry from February 1.
Position Limits Monitoring: Stock exchanges will monitor position limits during the day, with at least four random snapshots to detect breaches, starting April 1.
These measures, aimed at protecting investors and maintaining market stability, particularly in the high-risk environment of index options trading on expiry days, will become effective in a phased manner starting November 20, Sebi said in its circular.
However, the circular was silent on rationalisation of strike prices proposed in the consultation paper.
Sebi noted that derivatives market assist in better price discovery, help improve market liquidity and allow investors to manage their risks better.
Stock exchanges and clearing corporations together provide the platform and products for trading in derivatives market, while ensuring online real-time risk management, adequate surveillance, as well as smooth settlement of trades.
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