SEBI's F&O crackdown may curb accessibility for low-ticket retail players: Kotak report

Moneycontrol was the first to report about SEBI's working committee on F&O proposing measures to curb rapid growth in derivatives volume.

Reports that Securities and Exchange Board of India's (SEBI) expert working committee on futures and options (F&O) suggesting measures to the market regulator for reining in the frenzy in the derivatives market have been making the rounds. Analysts at Kotak Institutional Equities, while awaiting further clarity on the topic, believe that these steps will potentially curb accessibility for low-ticket retail (largely option buyers).

Moneycontrol was the first to report that SEBI's working committee on F&O has proposed several measures to curb the rapid growth in derivatives volume. These include increasing the minimum lot size of derivative contracts to Rs 20 lakh-Rs 30 lakh from the current Rs 5 lakh, restricting weekly options to one expiry per stock exchange per week, and limiting the number of strike prices for options contracts.

KIE highlighted that options trading has a high skew, given that 20 percent of retail option traders likely drive 90 percent of premiums. "Hence, an increase in the lot size when combined with fewer weekly expiries could be a feasible solution," the brokerage believes.

On the other hand, measures such as higher margins and monitoring of position limits, according to KIE, are probably aimed at restraining non-retail volumes. "We need to see the effectiveness of all of these measures put together, along with the potential second-order effects of flushing out retail activity from the market," it added.

The brokerage also argues that while discussions on regulating options often focus on average losses, the real issue lies in the accessibility of this complex product. "Compared to other equity trading methods like intraday and futures, options are intricate yet offer lower costs and higher leverage. This combination makes them potentially risky for investors," the brokerage explained.

How will regulatory interventions in F&O impact volumes?

Going through past cases in other markets, parallels can be drawn from historical episodes in Korea and China.

In Korea during 2010-11, a speculative bubble gripped the options trading market, much similar to China's frenzy in futures trading in 2015.

Regulatory interventions played a crucial role in both instances, with Korea increasing the minimum trading amount fivefold by December 2011, leading to a significant collapse in trading volumes.

Similarly, China's market saw a sharp decline in volumes after 2015 when mandatory margin requirements were raised from 10 percent to 40 percent. These regulatory interventions, according to KIE underscore how changes in derivatives regulations can have a crushing and lasting impact on volumes, as seen in both these cases.

Another example is the RBI's recent interventions in the currency derivatives market caused also a major upheaval, leading to a sharp decline in volumes, the brokerage added. Going by these historical cases, there has been concerns over volumes drying out if the market regulator initiates regulations in the derivatives market.

However, market veterans are coming out in support of the SEBI's steps towards reining in the heightened activity in the derivatives segment. Market veteran and founder of Kedia Securities, Vijay Kedia, said that the ongoing heightened interest and activity in the futures and options segment of the stock market is beginning to 'appear like a stampede.'.

Also Read | F&O frenzy in equities now turning into a stampede, warns Vijay Kedia

Speaking to CNBC-TV18, Kedia reiterated his decade-long concerns about the escalating frenzy in the F&O segment. He expressed alarm, referring to the current market activity as a stampede rather than mere euphoria. Kedia also emphasised the urgency for SEBI to intervene, cautioning that the situation could potentially lead to unfavorable outcomes if left unchecked.

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