SEBI plans tighter norms for derivatives

The regulator has proposed that for a stock to be considered for futures and options (F&O) trading, it need to have traded for 75% of the trading days.
Image used for representational purpose.
Image used for representational purpose.

MUMBAI: Amid massive spike in derivatives volumes and increasing participation of retail investors in this segment despite over 91% of the heavily losing money from such trades, market watchdog Sebi has proposed tighter rules for derivatives contracts on individual stocks by ensuring sufficient liquidity and trading interest from market participants, something currently required only for contracts on indices.

In a discussion paper the regulator has proposed that for a stock to be considered for futures and options (F&O) trading, it need to have traded for 75% of the trading days.

Mooting tighter rules on trading in individual stock derivatives, the Sebi says such liquidity rules are needed to avert risks of market manipulation after recent explosive growth particularly in options trading. The paper comes amid reports that Sebi and other financial regulators were planning to form a panel to assess stability risks emerging from a surge in derivatives markets.

F&O in general and options trading in particular has soared in the past five years, fueled mainly by retail investors who by Sebi’s own data have been losing from this exposure. The growth in this segment has been such that the notional value of index options traded over doubled in FY24 to $907.09 trillion from the previous year before, as per NSE, which controls over 95% of the domestic derivatives volume which also makes it the world’s largest in this segment.

Of the 108 billion options contracts traded worldwide in 2023, as much as 78% were on domestic exchanges, as per the data from the Futures Industry Association. Retail investors make up 35% of derivative trading in the country.

An IIFL note warned that 25 of the 182 stocks on which F&O contracts are traded will ineligible for trading if the regulator’s proposals are implemented.

Sebi further said derivatives contracts on individual stocks should have sufficient liquidity and trading interest from market participants, to the extend that a stock to be included

in the F&O segment should have been traded for at least 75 percent of the trading days, Sebi said without specifying over what period.

Also, Sebi wants 15% of active derivatives traders should have traded the stock; average premium daily turnover should be Rs 150 crore; average daily turnover must be between Rs 500 crore and Rs 1,500 crore; and the maximum number of open F&O contracts permitted for the underlying stock must be Rs ,250-1,750 crore, Sebi said, again without specifying any time periods.

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