FINANCIAL MARKET regulators Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are worried that the surging volumes in futures and options have started impinging on capital formation and thus pose a systemic risk to India’s economic growth.
“Two years ago, when retail investors flooded the F&O segment, we worried about losses to them, and restricted our action to educating them, warning them. Indeed, nine out of 10 investors were losing money as we subsequently found out. From a micro concern of retail investor losses, it has grown to be a macro problem in just two years; household savings are finding their way into F&Os, it is threatening to hurt capital formation, investment and growth,” said a source close to regulatory decision making, who did not wish to be named.
Futures and options are derivative contracts that derive their value from underlying assets that include stocks, commodities, currencies etc. Based on their expectation of future price movement, investors enter into a contract to buy or sell the asset in ‘lots’ (a lot has multiple units of the asset) by paying a small margin amount.
Data sourced from a recent SEBI bulletin on futures and options shows a sharp jump in both turnover and number of contracts traded. While F&O combined turnover at BSE and NSE jumped more than four times to Rs 9,504 lakh crore in May 2024 from Rs 2,189 lakh crore in May 2022, the number of contracts traded surged by more than five times to 1,373 crore from 262 crore during the period.
SEBI is also cognisant of the reservations of certain market players, who still do not agree with a clampdown on F&Os. While retail investors are the ones who end up with aggregate losses in F&O, those on the other side who make money are largely “proprietary traders and high frequency traders”, the sources said. The market regulator no longer believes the only purpose that derivatives trading serves is risk hedging for investors and businesses at a low cost. “Much of it is speculation now,” the sources said.
SEBI had set up a working group under former executive director of RBI, G Padmanabhan, to study the derivatives segment and suggest measures for risk management and investor protection. The sources said the working group met mid-July and is close to presenting a report to the standing committee of SEBI.
It is learnt, an interim report with immediate measures that SEBI can immediately put in place is likely. The group is learnt to have sought more data on certain aspects. “Once SEBI provides all data, the group would present a final report,” said a source.
Sources said the recommendations in the interim report may include an increase in the minimum value of F&O contracts by 4-5 times from the current limit of Rs 5 lakh and also increase the margin requirement for investors among others.
A source, who influences decision making in the financial markets, said, “I know that at an individual choice level we should not intervene. But now its not about individual choice. It is about the entire piece and pace of growth. If it (F&Os) is allowed to continue at the same pace of growth, we can only imagine what will happen. A lot of money is going out for no good reason. So we need to think about this at a macro level.”
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