Moneycontrol report: Measures to curb derivative volume growth

Moneycontrol report: SEBI’s working committee on futures and options has reportedly recommended increasing the minimum lot size of derivative contracts from the current Rs 5 lakh to Rs 20 lakh to Rs 30 lakh. Additionally, they suggest limiting weekly options to a single expiry per exchange each week. According to a report by Moneycontrol, the panel recommended that a key measure to prevent massive growth in derivative volumes is to limit the number of strike prices for option contracts. The Securities and Exchange Board of India, SEBI, last month appointed a working committee of experts to address the issue of excessive speculation due to high retail participation in recent years. The SEBI-appointed expert group on exchange-traded derivatives has begun discussing seven proposals to address regulatory issues and protect small investors from risks in stock indices and options trading. SEBI has been closely monitoring F&O trading due to the recent increase in retail investor participation and the potential risks involved.

“The expert group will deliberate in detail on the advantages and disadvantages of each of the seven proposals for protection of small investors involved in futures and options (F&O) trading. We know that nine out of ten small investors lose money on F&O. The recommendations of this group will be considered by the Secondary Market Advisory Committee for a final decision,” a source privy to the development told PTI. Options are financial contracts that give their holder the right, but not the obligation, to buy or sell the underlying asset at a specified price within the contract period. The panel members will recommend short-term strategies to strengthen investor protection and improve risk metrics in this market segment. According to sources, the proposals include rationalising or limiting weekly options, rationalising strike prices of underlying assets and eliminating calendar spread profits on the expiry day. The other four proposals were early collection of option premium from option buyers, intraday monitoring of position limits, increase in lot size and increase in margin requirements near contract expiry. Amid the volatility in the market, both Sebi and the Reserve Bank have expressed concern over the risks associated with retail investors. Sebi Chairperson Madhabi Puri Buch had recently said that the capital market regulator has anecdotal evidence of people borrowing money to make speculative bets in the derivatives segment and ruled that household savings are going into speculation. According to a Reserve Bank report, the rapid increase in F&O trading volumes in recent years can lead to several challenges as retail investors who do not follow proper risk management can be affected by sudden market movements. The think tank is also keeping a close watch on weekly options as they are the most attractive for retail investors who can participate with less capital. Rationalising strike prices to protect small investors from losses is another area of ​​focus. The think tank is also studying options to increase lot sizes.

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