MC EXCLUSIVE Is Sebi revisiting F&O suitability? Recent remarks indicate entry criteria discussion is back on table and here's how it could look

Is Sebi revisiting F&O suitability? Recent regulatory comments indicate entry criteria discussion back on the table

Recent speeches by Sebi Chairman Tuhin Kanta Pandey and Whole Time Member Ananth Narayan G suggest that the regulator may reconsider its stand on product suitability and entry barriers for Futures & Options (F&O). The process, if revived, will undergo a thorough consultative exercise with exchanges, brokers, and other market participants.

Moneycontrol has learned that last year the idea of product suitability was discussed with expert working group. The proposal was to introduce product suitability framework by evaluating various criteria at the time of account opening. Also, based on combination of various financial and non-financial related checks, an overall profile score was to be generated.

What kind of entry checks possible?

As per the note circulated by Sebi to the expert working group last year, when the proposal was under active consideration, financial and non-financial parameters were suggested. These parameters then envisaged may give some clue about the regulatory thinking.

Financial: For the financial criteria the income and tax paid data was to be picked up based on Income Tax Return (ITR). Minimum amount in the bank account for past few months and minimum net worth for writing options was proposed.

Non-Financial: Also, there was a non-financial criterion like a mandatory exam, though kind of exam was not elaborated.  Initial cooling off period after account opening before enabling F&O, Mandatory cooling off or closure after losing certain amount in F&O, only permitting Accredited Investors to participate in F&O and a System driven Stop Loss Approach by exchanges or brokers was discussed. But the proposal was abandoned then, as participants wanted to see the regulatory measures initiated especially the steps to curb frenzy on weekly expiry.

Regulatory thinking on excessive F&O trades
The regulatory intent was to ensure that derivatives are accessed only by individuals with the financial capacity to handle leveraged products amid volatility. Sebi has repeatedly stressed that ease of account opening and digitisation should not give unqualified investors exposure to complex products. The aim is to reduce the number of small traders incurring heavy losses by consolidating participation among investors and institutions with stronger financial capacity and market knowledge.

Retail traders’ losses in F&O and Sebi's concerns

Sebi in the note to expert working group said, “Considering growth of derivatives segment over the years combined with increased participation by individual investors in this segment and the poor profitability outcome for them, there is a need to stipulate certain objective criteria for allowing access to this segment”. Sebi’s recent study on F&O trading suggests that 91 percent of traders incurred losses in FY25 in F&O. The study indicates that the net losses of individual traders widened by 41 percent to Rs 1,05,603 crore in FY25 from Rs 74,812 crore in FY24, after accounting for transaction costs.

The existing practice of on-boarding clients

As per the existing practice, SEBI Circular Aug 22, 2011 mandates brokers to collect documents (ITR, bank statement, net worth certificate) for clients trading in derivatives, but no minimum threshold is specified. Brokers are asked to share risk disclosure documents also, but hardly its explained to the clients.

Can the issue be solved without new barriers?
Brokers have resisted client profiling, arguing that verifying ITRs and bank accounts is cumbersome. The regulatory view is that if brokers conduct proper profile checks at the onboarding stage and exchanges enforce compliance, the issue could be addressed without new entry barriers. Currently, clients are provided with risk disclosure documents during account opening, but most rarely read them until faced with heavy losses.

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South Korean Model for entry check in derivatives

South Korea permits only qualified retail investors in its derivatives market through a two-stage entry system. In the first stage, investors must complete an education programme, undergo mock trading, and deposit a minimum margin before being allowed to trade in simple index or stock futures. In the second stage, those with over a year’s trading experience and a higher margin deposit can access more complex products such as structured futures and options.

No regulatory change without consultation

Though the same proposal of product suitability was abandoned last year due to concerns in implementation from stakeholders, especially from brokers.  Sebi, has again clarified that any regulatory tweak in equity derivatives whether in tenure of contracts or product suitability will not happen without wider consultation.

An email seeking comments from Sebi on the issue of product suitability did not elicit any response.

Sebi, Chairman, Tuhin Kanta Pandey in his speech at FICCI CAPAM on August 21, said on the issue of equity derivatives, “We will consult with stakeholders on ways to improve, in a calibrated manner, the tenor and maturity profile of derivative products, so that they better serve hedging and long-term investing. Ensuring risk awareness and suitability is equally important and constructive ideas for appropriate stakeholder engagement will be much needed to achieve this goal”.

In the same event, Sebi’s Whole Time Member, Ananth Narayan G, also emphasised on the issue of equity derivatives and said, “Equally important is ensuring risk awareness and suitability amongst participants. We are open to objective and simple mechanisms to ensure that derivative participation is informed, suitable, and appropriate. Here again, stakeholder engagement will be key – we are open to all constructive ideas”

Sebi had first raised the concern of excessive equity derivative trading, in its July 2017 discussion paper. Even then the issue of product suitability was raised but the proposal could not take off.

Also read: Sebi may tweak key norms governing ETF trading to reduce risk, align with real-time conditions