The Futures and Options Working Committee has proposed several measures to curb the surge in derivatives trading volumes. According to a Moneycontrol report, the key suggestions include increasing the minimum lot size for derivatives contracts from Rs 500,000 to a range of Rs 2-3 million, restricting weekly options to one expiry date per week per stock exchange, and reducing the number of strike prices for option contracts. These changes are aimed at addressing excessive speculation in the derivatives market, sources told Moneycontrol.
The Securities and Exchange Board of India (SEBI) had announced last month that it had set up the committee to tackle the problem of high retail participation that leads to excessive speculation.
According to the report, there are two main measures proposed by the Commission that, if implemented, could have a significant impact on trading volumes: a significant increase in contract sizes would make derivatives trading unaffordable for small traders, and weekly expiry limits would reduce trading opportunities.
Other proposals include capping strike prices, requiring option buyers to pay premiums up front, intraday monitoring of position limits and increasing margin requirements as expiration approaches, he added.
These recommendations will be considered by the Secondary Market Advisory Committee before a final decision is taken, according to a Moneycontrol report.
The surge in derivatives trading volumes in India has raised concerns. While SEBI Chairman Madhavi Puri Buch has said that robust margin regime means the increase in derivatives trading volumes does not pose a systemic risk, the report noted that the impact of high retail participation in derivatives trading on society is worrying.
The SEBI study further noted that there is anecdotal evidence that many individuals are borrowing money to try to make quick profits from options trading, despite around 90% of retail traders incurring losses in options trading. Market experts argue that most weekly contracts are used for speculation purposes and not hedging, the report said.
In response to a question from Moneycontrol, SEBI Chairman Buch expressed readiness to remove all derivative instruments if the committee recommends it. “We are completely data-driven. If it is said to be necessary and it is the committee’s recommendation and we agree with the logic, then we will do it,” Buch said at a press conference after the last board meeting on June 28.
According to SEBI data, overall derivatives trading volumes surged from Rs 210 trillion (FY18) to Rs 500 trillion (FY24). Retail participation in the futures and options (F&O) segment grew by over 40% from Rs 6.5 lakh crore in FY23 to Rs 9.6 lakh crore in FY24. Retail participation in index options also saw a surge, rising to 41% in FY24 from 2% in FY28, the report said.
