Sebi wants to reduce high derivatives-to-cash turnover

The Securities and Exchange Board of India (Sebi) is planning measures to reduce the high proportion of derivatives-to-cash turnover in the market. It is considering, among others, limits on the number of open positions and restrictions on entry of small investors in the derivatives segment. On the cash side, Sebi is willing to take steps to boost the stock lending and borrowing mechanism and allow higher margins for trading. The aim is to make the cash segment attractive.

Trading volumes in the domestic market are skewed in favour of futures and options (F&O), with Rs 15 getting traded in the derivatives market for every rupee of trade in the cash segment. The derivatives-to-cash ratio in India is globally one of the highest. 

According to sources, Sebi might insist on individuals having financial market knowledge if they want to trade in the F&O segment. Also, to increase the margin on volatile stocks and indices traded in the derivatives segment. 

The regulator is concerned that lack of knowledge about the various aspects of derivatives trading could be forcing small investors to take undue risk. In July, it issued a discussion paper on 'growth and development of the equity derivatives market', asking various stakeholders to evaluate the need for strengthening the segment. “The regulator has received several proposals in this regard and have identified key issues which need to be addressed,” said a person privy to the development. 

The growing participation of small investors in the derivatives segment, particularly those who don’t deal in the cash segment, being considered, added the person. It has been observed that there are high numbers of individual stocks which are illiquid and possibly posing a risk to small investors. The data is being examined and whether these are eligible to be part of the derivatives segment, explained the person cited above.

Sebi feels entry requirements for individuals and even brokers for the derivatives segment require more stringent rules. “The capital adequacy requirement does not suffice. One should have proper understanding of the risk involved in this segment,” said another source in the know.

Sources say at a recent Sebi expert committee meeting, the regulator discussed the loss faced by investors over five years. It is reported that nearly half the individuals suffered losses in the derivatives segment. 

Recently, Sebi raised lot sizes on the F&O side. Chandan Taparia, associate vice-president at Motilal Oswal says even this hasn't helped enough to deter people from participating in the high-risk segment. 

“Sebi’s objective seems to be to discourage retail (small) investors who are not so well-informed from taking positions in speculative bets,” said Yogesh Chande, partner, Shardul Amarchand Mangaldas. “Fear and greed cause investors to make bad decisions.”