FPIs express concerns over Sebi’s derivative curbs; seek a more calibrated approach

Sebi reaches out to FPIs; discusses derivative market curbs

Some foreign portfolio investors (FPIs) have expressed concerns over the Securities and Exchange Board of India’s (Sebi’s) plan to impose curbs on derivatives trading, people with direct knowledge of the matter said.

In private meetings with leading foreign funds on the sidelines of the JP Morgan India Investor Summit last week, Sebi officials assured FPIs that their concerns were largely around the soaring volumes in index options around expiry, the people cited above said, requesting anonymity.

The development comes as Sebi’s board is set to consider proposals to tighten futures and options (F&O) regulations at a meeting on Monday.

Sebi’s interactions with FPIs reflect the regulator’s efforts to keep foreign funds informed of its actions and thought process, as demonstrated by its newly launched FPI outreach programme.

An email sent to a spokesperson for Sebi remained unanswered.

During these interactions, FPIs have also suggested Sebi should follow a more calibrated approach and gradually tighten the rules instead of bringing major changes in a single go.

“In the past we have seen Sebi’s approach of rolling out huge changes in a short span of time, overwhelming the market participants. Then Sebi eases the norms again and this whole cycle creates a sense of uncertainty,” said a senior official of a leading foreign trading firm. “We have told Sebi in principle we have no objections to F&O tightening but measures to protect retail investors shouldn’t come at the cost of killing liquidity in the market”.

In response, Sebi officials told these foreign funds that the regulator has no plans to curb volumes in the derivatives market and the measures envisaged only discourage excessive speculation by retail traders who are often losing money in the market. “We have been told that Sebi’s concerns are largely around exponential volumes in the index options segment and measures being undertaken would not have much impact on market liquidity or volumes in F&O segment.”

The foreign funds who spoke with Moneycontrol also raised objections about the data published by Sebi regarding retail investors making losses in derivatives market. In the most recent paper published on September 23, Sebi said 93% of retail traders have made losses in the last three years and the total accumulated losses of these investors stood at Rs 1.8 lakh crore. “These studies seem to point foreign traders are culprits. Reality is the success the rate of even foreign traders is around 50% meaning we lose money in half of the trades,” said another person cited above. “And even in cases where we make money, the spread is very low especially post taxes. Hence, we try to make higher number of transactions.”

FPIs pitch the Hong Kong model for retail traders

Foreign funds have told Sebi to consider a framework akin to Hong Kong where only certain eligible retail traders are allowed to make F&O trades. In Hong Kong, the stockbrokers are bestowed with the responsibility of verifying if their retail clients understand derivatives market. “In India too such a system could be developed wherein only traders proficient with the F&O segment will be allowed to trade. By increasing the lot sizes or imposing higher margins/taxes would discourage even the genuine traders who are much needed for liquidity purposes.”

To be sure, Sebi had explored the concept of ‘Accredited investors’ in 2018 – a framework wherein people with certain financial qualifications would be allowed to trade in sophisticated high-risk segments of the market. However, the proposal was not implemented due to concerns expressed by retail investors.