Sebi begins crackdown on F&O mess, suggests 7 measures to save retail traders
July 30, 2024
Synopsis
The regulator, noting that 92.5 lakh retail traders and proprietorship firms suffered trading losses amounting to Rs 51,689 cr in FY24, released a consultation paper proposing measures to strengthen the index derivatives framework. These measures aim to enhance investor protection and promote market stability.
Amid concerns that youngsters are gambling household savings in the high risk-high return world of derivative trading, markets regulator Sebi on Tuesday proposed seven steps, including increasing the minimum contract size for F&O to Rs 20 lakh and limiting weekly options contracts.
While highlighting that 92.5 lakh retail traders and proprietorship firms incurred a trading loss of Rs 51,689 crore in FY24, the regulator released a consultation paper on measures to strengthen index derivatives framework for increased investor protection and market stability.
On the basis of measures suggested by an expert panel, Sebi has proposed following measures to be adopted by stock exchanges and clearing corporations.
1) Rationalisation of options strikes
Sebi has proposed to rationalise existing strike price introduction methodology. Strike interval should be uniform near the prevailing index price (4% around prevailing price) and the interval to increase as the strikes move away from prevailing price (around 4% to 8%), it said.
2) Upfront collection of options premium
In order to avoid any undue intraday leverage to end clients and to discourage any market wide practice of allowing position beyond the collateral at the end client level, it is desirable to mandate collection of options premium upfront from the options buyer.
3) Removal of calendar spread benefit on expiry day
Given the skew in volumes witnessed on the expiry day vis-à-vis other non-expiry days and the inherent basis and liquidity risk present therewith, the margin benefit for calendar spread position would not be provided for positions involving any of the contract expiring on the same day.
4) Intraday monitoring of position limits
Given the evolving market structure, the position limits for index derivative contracts shall also be monitored by the clearing corporations/stock exchanges on intraday basis, with an appropriate short-term fix, and a glide path for full implementation, given the need for corresponding technology changes.
5) Minimum contract size
The minimum value of derivatives contract should be increased from Rs 5-10 lakh to Rs 15-20 lakh in the first phase and Rs 20-30 lakh in the second phase.
6) Rationalising of Weekly options
Given there is an expiry of weekly contracts on all five trading days of the week, the regulator has proposed that weekly options contracts should be provided on a single benchmark index of an exchange.
7) Increase in margin near contract expiry
To address the issue of high implicit leverage in options contracts near expiry, creating a high risk on notional basis for entities dealing in options, Sebi said Extreme Loss Margin (ELM) should be increased by 3-5%.
F&O mess on Dalal Street
While derivatives market aid better price discovery, risk management and improve liquidity, heightened participation by retail traders and investors have made regulators raise red flags. The retail interest is so high that Indian markets account for 30% to 50% of global exchange-traded derivative trades. And 89% of them are minting losses, according to an earlier survey by Sebi.
The loss of Rs 51,689 crore made by retail traders and prop desks during FY24 in index derivatives is over 32% of the net inflows into growth and equity oriented schemes of all mutual funds during FY24.
Earlier in the month, the Economic Survey had also warned against F&O trading saying that such speculative trading has no place in a developing country like India and even equated it with gambling.
In the Union Budget last week, Finance Minister Nirmala Sitharaman hiked securities transaction tax (STT) on securities to 0.02% in futures and 0.1% in options.
Sebi chairperson Madhabi Puri Buch had also recently flagged concerns saying that household savings are not going into capital formation, but into speculative activity.
"It has now reached a scale where we feel the micro-objective of protecting the individual investor has changed to ...thinking about this being a macro issue,” she had said last week.
[The Economic Times]
