Sebi Proposes Measures to Protect Retail Traders in F&O Market
The Securities and Exchange Board of India (Sebi) has released a consultation paper proposing seven measures to strengthen the index derivatives framework and protect retail traders from losses in the futures and options (F&O) market. This comes after data showed that 92.5 lakh retail traders and proprietorship firms incurred trading losses of Rs 51,689 crore in FY24.
RD
by RA ALOK DAIYA
Background on F&O Trading Concerns
Derivatives markets aid price discovery, risk management and liquidity, but heightened retail participation has raised regulatory concerns. Indian markets now account for 30-50% of global exchange-traded derivative trades, with 89% of retail traders incurring losses according to a Sebi survey. The Rs 51,689 crore loss by retail traders in FY24 exceeds 32% of net inflows into equity mutual funds that year.
The Economic Survey warned against speculative F&O trading, equating it to gambling. Finance Minister Nirmala Sitharaman also hiked securities transaction tax on F&O trades in the recent budget. Sebi chairperson Madhabi Puri Buch flagged concerns about household savings going into speculation rather than capital formation.
Proposed Measures by Sebi
1. Rationalise Options Strikes
Propose uniform strike intervals near prevailing index price (4% around) and increasing intervals for strikes further away (4-8%).
2. Upfront Premium Collection
Mandate upfront collection of options premium from buyers to avoid undue intraday leverage.
3. Remove Calendar Spread Benefit
Remove margin benefit for calendar spread positions on expiry day due to skewed volumes and risks.
4. Intraday Position Limit Monitoring
Monitor position limits for index derivative contracts on intraday basis.
Additional Proposed Measures
5. Increase Minimum Contract Size
Raise minimum value from Rs 5-10 lakh to Rs 15-20 lakh initially, then Rs 20-30 lakh.
6. Rationalize Weekly Options
Limit weekly options contracts to a single benchmark index per exchange.
7. Increase Margins Near Expiry
Increase Extreme Loss Margin by 3-5% near contract expiry to address high implicit leverage.
Market Data and Statistics
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.
Regulatory Concerns and Warnings
1
Economic Survey Warning
The Economic Survey warned against F&O trading, equating it with gambling and stating it has no place in a developing country like India.
2
Budget Measures
Finance Minister Nirmala Sitharaman hiked securities transaction tax (STT) on securities to 0.02% in futures and 0.1% in options in the Union Budget.
3
Sebi Chairperson's Concerns
Madhabi Puri Buch flagged concerns that household savings are going into speculative activity rather than capital formation, calling it a macro issue.
Happy Trading
As we look to the future, may your trading endeavors be filled with prosperity and joy. Let this be a reminder to approach the markets with a positive mindset and the discipline to achieve your financial goals.