F&O frenzy: Sebi panel moots 5-6x hike in lot size

A Sebi report of last September found that as many as 90% of retail traders in the derivatives space lost to the tune of over Rs 1.25 lakh each on average
Image used for representational purpose.
Image used for representational purpose.

MUMBAI: The Sebi-appointed panel on derivatives has suggested a slew of measures to curb the retail investments in the derivatives space, especially by retail investors, by calling for massively hiking the minimum lot size of F&O trades to Rs 20-30 lakh from Rs 5 lakh now and also capping the options contracts to just weekly, among others.

The recommendations, if implemented by the markets watchdog, will take the fizz out of the derivatives market, which has more than doubled to Rs 500 lakh crore as of March 2024, making India the world’s largest derivatives market with around 85% of the global volume and of which as much as 95% are on the NSE alone.

The F&O segment has been seeing massive participation from retail investors in recent years, rising by 40% from 65 lakh in FY23 to 96 lakh in FY24. Individual investors in index options rose from a low 2% in FY18 to 41% in FY24, Sebi chairperson Madhabi Puri Buch told reporters after the last board meeting when she also announced the formation of a panel for derivatives with the heads of NSE, BSE, clearing corporations and a few brokerages and mutual funds as the panel members. The panel will look into three dimensions -- market development, investor protection and risk parameters, she said, adding this is over and above the decisions on inclusions or exclusions done.

The panel formation was preceded by repeated warnings from the Sebi and even RBI governor who all feel the massive increase in the F&O volume was being driven by the retail (in index options) is about 41% in FY24, which was just about 2% in FY18, as per Buch, while the total F&O volume was Rs 500 trillion pie in FY24, up from Rs 210 trillion in FY18.

A Sebi report of last September found that as many as 90% of retail traders in the derivatives space lost to the tune of over Rs 1.25 lakh each on average. She had warned last week that a lot of household savings were going into speculation at the last board meeting which decided to constitute an expert group to look into F&O segment, which will submit a report to the secondary market advisory panel.

“Our main recommendations include increasing the lot size from present Rs 5 lakh to Rs 20 to Rs 30 lakh. Another way to curb the frenzy is to limit only one expiry per stock exchange per week instead of the daily now,” a member of the Sebi Working Committee on Futures and Options told TNIE, seeking not to be quoted.

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