Kolkata, Sebi-appointed expert group on exchange-traded derivatives has started discussions on seven proposals to address regulatory issues and protect small investors from risks in stock indices and options trading, sources said.
Panel members would recommend short-term strategies to bolster investor protection and improve risk metrics in this market segment, they said.
"The expert group will deliberate in detail the pros and cons of each of the seven proposals to protect small investors involved in futures and options (F&O) trading. We know that nine out of ten small investors lose money in F&O. The recommendations of this group will be considered by the Secondary Market Advisory Committee for a final decision," said a source close to the development. Options are financial contracts that give their holder the right, but not the obligation, to buy or sell an underlying asset at a specific price within a contract period.
According to sources, the proposals included rationalizing or limiting weekly options, rationalizing the strike prices of the underlying assets and eliminating calendar spread profits on the expiration day.
The other four proposals were an initial collection of option premiums from option buyers, intraday monitoring of position limits, an increase in lot sizes, and an increase in margin requirements near contract expiration. Both the Securities and Exchange Board of India (Sebi) and the Reserve Bank have expressed concerns over the risks associated with retail investors, amid market volatility.
Securities and Exchange Board of India (Sebi) chairman Madhabi Puri Buch recently said the capital markets regulator has anecdotal evidence of people borrowing money to make speculative bets in the derivatives segment and lamented that household savings are being allocated to such risky bets.
The regulator has also observed that options volume increases near the expiration of weekly contracts. Currently, all five business days in a week have at least one expiration of the NSE or BSE indices. According to Sebi data, the overall derivatives turnover was Rs 210 lakh crore in FY 2018, which jumped to Rs 500 lakh crore in FY24, it said, adding that individual investors in index options rose to 41 per cent in FY24 from 2 per cent in FY2018.
The rapid increase in F&O trading volumes in recent years could pose several challenges as retail investors who do not follow proper risk management could be affected by sudden market movements, according to a Reserve Bank report.
The equity derivatives segment has witnessed growing participation of retail investors in recent years, increasing by 42.8 per cent from 65 lakh in 2022-23 to 95.7 lakh in 2023-24. Trading volumes in The derivatives segment have witnessed exponential growth over the years in notional terms, while trading volumes measured by premium turnover have witnessed a linear growth pattern, according to the Financial Stability Report (FSR). RBI biannual.
The think tank will closely examine weekly options as they are the most attractive to retail investors who can participate with little capital, the sources said.
They said that rationalizing strike prices is another area of focus to prevent retail investors from incurring losses. "Retail investors tend to buy options at low prices, expecting very high returns, and shy away from options 'At the Money', which leads them to lose the premium paid," explained one of the sources.
'At the Money' (ATM) describes a situation where the strike price of an option is equal to the current market price of the underlying asset.
The think tank will also study options to increase lot sizes, sources said. The National Stock Exchange reduced the lot sizes of the F&O index after the BSE relaunched its derivative products a year ago.
NSE, the world's largest derivatives exchange in terms of contracts traded, had reduced the lot sizes of Nifty from 50 to 25 and BankNifty from 25 to 15.
Naresh Pachisia, Senior Vice President, Bharat Chamber of Commerce and Managing Director, SKP Securities Ltd, said, "SEBI's intention is in the right direction because when retail participation in options is left unprotected, it moves from useful wealth creation to addictive speculation, which is detrimental to your finances. Therefore, it is useful for the regulator to take measures to prevent this." He also added: "However, at the same time, they must ensure that the ability of long-term investors to hedge their portfolios using options is not affected. “An impactful investor education and awareness campaign could help.”
Panel members would recommend short-term strategies to bolster investor protection and improve risk metrics in this market segment, they said.
"The expert group will deliberate in detail the pros and cons of each of the seven proposals to protect small investors involved in futures and options (F&O) trading. We know that nine out of ten small investors lose money in F&O. The recommendations of this group will be considered by the Secondary Market Advisory Committee for a final decision," said a source close to the development. Options are financial contracts that give their holder the right, but not the obligation, to buy or sell an underlying asset at a specific price within a contract period.
According to sources, the proposals included rationalizing or limiting weekly options, rationalizing the strike prices of the underlying assets and eliminating calendar spread profits on the expiration day.
The other four proposals were an initial collection of option premiums from option buyers, intraday monitoring of position limits, an increase in lot sizes, and an increase in margin requirements near contract expiration. Both the Securities and Exchange Board of India (Sebi) and the Reserve Bank have expressed concerns over the risks associated with retail investors, amid market volatility.
Securities and Exchange Board of India (Sebi) chairman Madhabi Puri Buch recently said the capital markets regulator has anecdotal evidence of people borrowing money to make speculative bets in the derivatives segment and lamented that household savings are being allocated to such risky bets.
The regulator has also observed that options volume increases near the expiration of weekly contracts. Currently, all five business days in a week have at least one expiration of the NSE or BSE indices. According to Sebi data, the overall derivatives turnover was Rs 210 lakh crore in FY 2018, which jumped to Rs 500 lakh crore in FY24, it said, adding that individual investors in index options rose to 41 per cent in FY24 from 2 per cent in FY2018.
The rapid increase in F&O trading volumes in recent years could pose several challenges as retail investors who do not follow proper risk management could be affected by sudden market movements, according to a Reserve Bank report.
The equity derivatives segment has witnessed growing participation of retail investors in recent years, increasing by 42.8 per cent from 65 lakh in 2022-23 to 95.7 lakh in 2023-24. Trading volumes in The derivatives segment have witnessed exponential growth over the years in notional terms, while trading volumes measured by premium turnover have witnessed a linear growth pattern, according to the Financial Stability Report (FSR). RBI biannual.
The think tank will closely examine weekly options as they are the most attractive to retail investors who can participate with little capital, the sources said.
They said that rationalizing strike prices is another area of focus to prevent retail investors from incurring losses. "Retail investors tend to buy options at low prices, expecting very high returns, and shy away from options 'At the Money', which leads them to lose the premium paid," explained one of the sources.
'At the Money' (ATM) describes a situation where the strike price of an option is equal to the current market price of the underlying asset.
The think tank will also study options to increase lot sizes, sources said. The National Stock Exchange reduced the lot sizes of the F&O index after the BSE relaunched its derivative products a year ago.
NSE, the world's largest derivatives exchange in terms of contracts traded, had reduced the lot sizes of Nifty from 50 to 25 and BankNifty from 25 to 15.
Naresh Pachisia, Senior Vice President, Bharat Chamber of Commerce and Managing Director, SKP Securities Ltd, said, "SEBI's intention is in the right direction because when retail participation in options is left unprotected, it moves from useful wealth creation to addictive speculation, which is detrimental to your finances. Therefore, it is useful for the regulator to take measures to prevent this." He also added: "However, at the same time, they must ensure that the ability of long-term investors to hedge their portfolios using options is not affected. “An impactful investor education and awareness campaign could help.”
