SEBI F&O curbs may hit volumes: experts

• The Securities and Exchange Board of India (SEBI) imposition of curbs on derivatives to protect investors and ensure market stability may reduce volumes in futures and options (F&O) contracts, according to experts.

Highlights:

• The Securities and Exchange Board of India (SEBI) has introduced new measures to protect investors and ensure market stability, potentially reducing volumes in futures and options (F&O) contracts. This follows a SEBI study revealing significant losses by F&O traders over the past three fiscal years.

Key Measures Introduced by SEBI

Increased Minimum Contract Value:

• SEBI has raised the minimum contract size for index derivatives from ₹5-10 lakh to ₹15-20 lakh. This adjustment aims to align with market growth and mitigate risks for retail traders.
• According to Arun Kejriwal, Founder of Kejriwal Research and Investment Services, this change will significantly reduce the volume of contracts.

Impact on Index Option Contracts:

• Index option contracts have shown substantial growth, reaching ₹6,484 crore in the current fiscal’s first six months, which is two-thirds of the previous year’s total of ₹9,365 crore.
• This rapid growth, especially among retail traders, is a concern noted by Kunal Sanghavi, Chief Strategy and Transformation Officer at HDFC Securities.

Rationalisation of Weekly Index Derivatives:

• SEBI has restricted exchanges to offer weekly expiry derivatives for only one benchmark index to curb speculative trading. This measure aims to reduce excessive volatility caused by frequent expirations.

Additional Margin Requirements:

• An additional 2% extreme loss margin will be collected for all open short options at the start of the day and for short options contracts initiated during the day due for expiry on that day. This margin is intended to cover losses not accounted for by normal margin charges.

Expected Market Impact:

• The new measures are anticipated to lead to a decline in the volume of derivatives trading. Investors might shift their focus from derivatives to pure vanilla stocks as a result of the tighter regulations.

Implementation Timeline:

• The new regulations will take effect from November 20, 2023.
• Expert Opinions

Arun Kejriwal:

• Predicts a significant reduction in the number of F&O contracts due to the increased minimum contract value.
• Believes that the restrictions on weekly derivatives will push traders towards stock investments.

Kunal Sanghavi:

• Highlights the exponential growth of index option contracts and the high participation of retail traders as a concern.

Prelims Takeaways:

• Capital Market of India
• SEBI