 "Madhabi Puri Buch, Chairperson, Securities and Exchange Board of India (SEBI) at the “Indian Capital Markets Transformative Shifts Achieved through Technology and Reforms” Photo: Kamlesh Pednekar")
Madhabi Puri Buch, Chairperson, Securities and Exchange Board of India (SEBI) at the “Indian Capital Markets Transformative Shifts Achieved through Technology and Reforms” Photo: Kamlesh Pednekar
The Securities and Exchange Board of India (Sebi) on Tuesday proposed seven key changes to the derivatives trading framework to enhance investor protection and market stability.
Based on expert working group recommendations, the market regulator has proposed fewer option strike prices, upfront collection of options premiums, tripling minimum contract sizes, and reducing weekly expiries.
The much-awaited recommendations come amid concerns raised by various financial regulators and economists about exponential growth in the derivatives market, where daily turnover tends to exceed Rs 400 trillion, and sharp losses incurred by small investors.
“If there is an annual loss of Rs 50,000 – Rs 60,000 crore of household savings through derivatives, it is a macro concern. This (money) could potentially get deployed more productively in the next IPO round, mutual funds, or productive use for the economy,” Sebi chair Madhabi Puri Buch said at an event at NSE ahead of the release of the consultation paper.
If Sebi’s proposals are approved, both the NSE and BSE could see a dent in their trading volumes and, in turn, erosion in their profitability.
When questioned about the impact of new norms on its profitability, MD & CEO Ashishkumar Chauhan of NSE, the country’s largest exchange, said bourses are first-level regulators first and a profit-making enterprise later. He added that they will follow Sebi’s guidelines on derivatives once they are finalised.
Sebi’s proposal will mean exchanges reduce their offerings in the options segment to one benchmark each for weekly expiry. At present, every day of the week has a weekly expiry of an index. This has given rise to speculative trading with the bulk of the notional turnover generated on the expiry day.
Further, the regulator plans to increase the minimum contract size to Rs 15 lakh to Rs 20 lakh from the current Rs 5 lakh. This will further be increased after six months of the introduction of the contract.
The other proposals include upfront collection of options premiums from buyers, an increase in contract margins near expiry, intraday monitoring of position limits, rationalisation of contract strikes, and removal of calendar spread benefits on the expiry day.
As per Sebi, the cumulative trading loss incurred by 9.25 million unique individuals and proprietorship firms who traded in the index derivatives of NSE stood at Rs 51,689 crore in FY24.
Sebi has also pointed out that nearly 28 per cent of the notional turnover on Nifty weekly expiry comes in the last hour, while the same stands at 40 per cent for Sensex.
“Bursts of speculative hyperactivity in derivative markets, particularly by individual players, can detract from sustained capital formation by endangering both investor protection and market stability,” noted Sebi in the consultation paper.
As per an industry estimate, over 80 per cent of the fees collected by the National Stock Exchange (NSE) comes from options.
Besides exchanges, the fresh proposals will hurt brokers, who are already grappling with a slew of regulatory changes.
First Published: Jul 30 2024 | 8:51 PM IST