SEBI reviewing equity derivatives rules; wants to deter retail investors in F&O

Ajay Tyagi, chairman of SEBI, speaks at a news conference after its board meeting at SEBI headquarters in Mumbai

Capital and commodities market regulator SEBI (Securities and Exchange Board of India) is set to come out with a discussion paper on revising regulations for the equity derivatives (futures and options) segment. Among other proposals, the regulator may propose doubling the lot size for a contract to Rs 10 lakh from Rs 5 lakh currently. The idea behind this is to make futures and options unattractive to retail investors, who do not fully understand the risks associated with them.

The broader objective is to encourage retail investors to invest in shares rather than make speculative bets.

After the recent board meeting, SEBI Chairman Ajay Tyagi said the regulator wanted to review the derivatives market framework and introduce suitable products for investors in line with global best practices.

“Our investor survey found that retail investors are not aware of the risk component of the derivatives market; some thought derivatives are safer than bonds,” he had said.

A bigger lot size means more margin money to be deposited with the broker. While high networth individuals may not feel the pinch so much, this could make F&O trading expensive for retail investors. In 2015, SEBI had increased the lot size to Rs 5 lakh from Rs 2 lakh.

The regulator is considering a minimum networth limit for traders wanting to trade in equity derivatives. At present, F&O traders are required to provide six months of bank statement/IT returns as proof of their financial position.

SEBI may also seek comments on Securities Transaction Tax (STT) on options trades. The regulator may then make suggestions to the Finance Ministry, under whose purview STT falls.

In options trades, the STT is levied on the premium amount only while it is levied on the full value in cash market trades.

SEBI will also seek suggestions on deliveries in options trades. At present, all F&O trades are settled in cash. This means that buyers of call options or put options do not have the choice of taking/giving delivery of the underlying shares in case the price moves against them. Such a choice would also help curb manipulation by operators, as the counter-party will not compulsorily have to settle in cash.

Some market participants have been asking that SEBI rethink single stock futures and options. They feel that indices are good enough for hedging purposes, and that single stock F&O only serve to encourage speculation.

At present, less than 2 percent of the country’s population invest in equities, going by the 2.7 crore odd demat accounts between CDSL and NSDL.