📷 Image Credits: Moneycontrol
In an effort to strengthen monitoring on retail equity derivatives in India, the Securities and Exchange Board of India (SEBI) has established a 15-member panel to propose measures for investor protection and risk management. The working group, led by former RBI Executive Director G Padmanabhan, is comprised of representatives from various sectors of the market ecosystem, including exchanges, brokers, clearing corporations, mutual funds, and academic experts from Indian Institutes of Management (IIMs).
The terms of reference for the working group focus on recommending short-term and long-term measures to enhance investor protection in exchange-traded derivatives (ETDs) and improve the risk metrics and architecture of ETDs, aiming to bolster market development and regulation. With the significant increase in retail participation in the derivatives market in recent years, concerns have been raised about the potential financial losses for retail investors in the event of a market downturn. This surge in derivatives trading has prompted regulatory bodies like SEBI and the RBI to closely monitor the situation.
According to recent data, the number of futures and options (F&O) traders in India has soared from FY19 to FY22, with the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) ranking as the top two stock exchanges globally in terms of derivatives contracts traded. The exponential growth in retail F&O trading has caught the attention of policymakers, with Finance Minister Nirmala Sitharaman warning about its impact on investor sentiment and household finances.
SEBI is also considering eligibility criteria for individual stocks to enter the derivatives segment, with a proposal under review by the regulator’s committee. The discussion paper released by SEBI in early June suggests that derivatives contracts on single stocks should demonstrate sufficient liquidity and trading interest, a criterion currently only required for index contracts. The formation of this new panel underscores SEBI’s commitment to ensuring robust risk management and investor protection in the equity derivatives market, addressing the growing concerns surrounding retail participation in derivatives trading.
