MUMBAI: The national brokers body Anmi (Association of National Exchanges Members of India) has proposed a five-point reform agenda to grow a healthier market, which includes deepening the cash market segment to wean away retail investors from derivatives. It has also called for entry barriers for retail by way of a cooling period in the market or a professional training in derivatives.
Anmi president K Suresh told reporters here Friday that the five-point reform agenda marks the 30th foundation day celebrations of the association that came into being on August 1, 1996, adding that they will submit the agenda to the market regulator Sebi shortly.
The five points in the reform agenda are: deepening the cash market through expanded single stock derivatives; building a robust securities lending and borrowing (SLB) ecosystem; reviving currency derivatives market with unified regulatory support; ensuring parity by allowing co-location facility in commodity markets; and introducing a fixed income index derivatives by reforming the retail F&O access.
Suresh said these reforms if implemented will go a long way in strengthening and modernizing the financial ecosystem. The problem with the present market structure is structural and more regulatory measures are needed to deepen participation, foster innovation, and enhance our competitiveness in the global capital market landscape, he added.
He also spoke on the need to reform retail participation in equity F&O, where over 93% of traders continue to incur losses (to the tune of Rs 1.5 lakh per annum as per Sebi’s own findings). This suggests the need to strengthen eligibility norms, position limits, risk management frameworks, and investor protection measures to ensure responsible and sustainable participation, he said.
On deepening the cash market by expanding the list of individual stock with derivatives options, he said the problem is that the vast majority of retail investors don’t know anything about derivatives.
“So either Sebi should make it mandatory for an individual to get professional training in derivatives before allowing them in. We can follow what Korea does on this front where a diploma is mandatory to trade in derivatives. Another way to curb the faster rising volume in F&O is to make an investor wait for a year to two in the cash segment before allowing her into derivatives,” Suresh said.
The objective is to strengthen and deepen the equity market, and one way to do so is to expand the list of individual stocks with F&O options, which currently is limited to only the key index components, he added.
In most markets, almost 80% of scrips have F&O while here this is not even 5%, he said, adding to begin with Sebi can widen the universe of stocks eligible for derivatives trading by allowing all the Nifty 500 stocks to be in the F&O space.
“We maintain some of the most restrictive eligibility norms globally, with only a limited number of stocks qualifying for F&O. In contrast, international markets allow 70–80% of traded stocks to be part of the derivatives segment. Global and domestic studies show that introducing single stock options leads to an 80–120% increase in cash market volumes. Expanding the derivatives basket will not only boost retail and institutional participation but also improve overall market depth and resilience,” he said.
He said deepening the cash segment can also be achieved through a robust securities lending and borrowing (SLB) ecosystem.
“Our SLB market remains underdeveloped due to high margin costs (100%) and low retail awareness. We want Sebi to rationalise margin requirements which can improve retail access to SLB platform. A well-functioning SLB ecosystem will empower investors to hedge or express views without relying solely on derivatives. It also helps curb excessive speculative activity and encourages a healthier market structure,” Suresh said.
Another way to deepen the cash market is to build a currency derivatives market with unified regulatory support, he said, arguing that the currency derivatives segment, once highly active, has seen declining volumes due to regulatory fragmentation between Sebi and the RBI. What is needed is regulatory clarity and restoration of access for unhedged positions, he said.
“Reviving this segment is vital for exporters, importers, and institutions to effectively hedge currency risk in a globally integrated economy,” he said.
Calling for parity with equity brokers when it comes to co-location facility for commodity brokers, he said currently, co-location service, which is critical for reducing latency and improving trading efficiency, is allowed only in equities and prohibited in commodities, which is allowed in other markets.
“This regulatory disparity limits competitiveness and foreign investor access. This will go a long way in modernising our commodity trading infrastructure and create a level playing field for all market participants,” he said.
Finally, Suresh said what the retail market needs is more products, one of which could be a fixed income index for derivatives via reforming retail F&O access.
“Introducing a fixed income index derivatives linked to government and corporate bond benchmarks can complete our capital market product suite. These instruments will allow mutual funds, pension funds, and institutional investors to hedge interest rate and credit risk efficiently,” he said.