SEBI Strengthens Futures and Options Rules to Protect Retail Investors
Taking a step towards protecting the retail investors from the gains made by such speculative trading, SEBI has increased its regulations over F&O trading. The “new norm” seeks to reduce the losses incurred by many small investors, who have formed the majority of loss making propositions in derivatives market. SEBI’s latest study reveals that 93% of the F&O traders have lost out, while more than 75% have an annual income of less than Rs 5 lakh. The percentage of loss-making traders has risen from 89% during the previous financial year to 93%.
According to the Economic Survey 2023-24, even though derivative trading offers immense scope for fabulous profits, it feeds mainly on the gambling instinct in investors. The survey also mentioned that even though retail participation in derivatives has increased steadily over the years in India, worldwide, such trading generally results in losses. Several chartered accountants also have instances wherein individuals have lost more than their annual income in F&O trading.
The new regulations that are introduced by SEBI, in fact will try not to face such losses and hence enforced strict regulations on F&O contracts:
1. Contract Size Increased: SEBI has increased the minimum contract size for index derivatives to Rs 15-20 lakh from Rs 5-10 lakh. The same is based on the current growth of the market. The circular issued by SEBI mentioned that a derivative contract should have an introduction value of at least Rs 15 lakh and be within the range of Rs 15 lakh to Rs 20 lakh at regular reviews.
2. Restriction on Weekly Expiries: In order to curtail speculative trades in the market, the exchanges have been restricted to providing weekly expiry derivatives on only one benchmark index.
3. Expiry Margin on Top: Additional 2% margin will be taken from the short options contract at the time of expiry for regulating speculative risks. This new charge will be effective after November 20, 2024, and here the reason is to synchronize the high-risk nature of derivatives trading with market growth.
4. Upfront Premium Payment: Buyers of options will now be required to pay the full premium upfront. Additionally, the benefit of offsetting positions across different expiries will no longer be allowed on the day of expiry, effective February 1, 2024.
5. Position Limits Monitoring: Stock exchanges will have a close monitoring of position limits that will include at least four random snapshots a day to flag breaches. This will commence April 1, 2024.
These measures are being implemented on a phase-wise basis; the aim is therefore to protect investors while at the same time ensuring market stability, especially on expiry days for index options trading. Strike price rationalization, part of an earlier proposal, does not appear to have been mentioned in the circular issued by SEBI.
Though the derivatives market is important for price discovery and risk management, the recent action by SEBI, however, signals careful oversight over the fact that retail investors should not be allowed to be excessively exposed to risks. Stock exchanges and clearing corporations will continue to play crucial roles in the risk management and ensuring the derivatives market performs its intended role effectively and smoothly.
