The Working Committee on Futures and Options has proposed several measures to address the rapid increase in derivatives trading volume, according to a report by Moneycontrol. The key recommendations include:
Here’s the plan:
- Big money, only: The minimum amount you need to play the derivatives game is going up, way up – from ₹5 lakh to a whopping ₹20-30 lakh. This could shut out a lot of smaller players.
- Fewer choices, less action: Think you can time the market perfectly with weekly options? Think again. The committee wants to limit how many weekly options contracts you can choose from.
- Less is more: There might also be fewer strike prices available for options contracts, giving traders less flexibility.
These changes aim to curb the excessive speculation in the derivatives market, sources told Moneycontrol.
Last month, the Securities and Exchange Board of India (SEBI) established this expert committee to tackle the issue of high retail participation driving excessive speculation in derivatives.
The report notes that two of the committee’s primary suggestions – the substantial increase in contract size and the limitation on weekly expiries – could significantly impact trading volumes if implemented. These recommendations will be reviewed by SEBI’s Secondary Market Advisory Committee before a final decision.
The surge in derivatives volume has raised concerns, though SEBI Chairperson Madhabi Puri Buch stated the increase does not pose a systemic risk due to robust margining. However, the social consequences of high retail participation in risky derivatives trading are troubling, the report observes.
Anecdotal evidence suggests many individuals are borrowing money to trade options, hoping for quick profits, despite SEBI studies showing nearly 90% of retail traders lose money on options bets. Market experts argue most weekly contracts are used for speculation rather than hedging.
In response to Moneycontrol, Buch expressed openness to removing any derivative products if recommended by the committee, stating SEBI is “entirely data-driven” and will act on the committee’s logic.
SEBI data shows the overall derivative turnover has soared from ₹210 lakh crore in FY18 to ₹500 lakh crore in FY24, with the Futures and Options segment seeing growing retail investor participation, increasing by over 40% from 65 lakh to 96 lakh.