It’s a piece of data that is as perilous as incredible. In 2023, as many as 85.3 per cent of all the Futures and Options (F&O) contracts traded worldwide happened in India, while the Mecca of big speculative dealings, the US, accounted for only 11.2 per cent. Expanding the horizon to a 10-year period, the share of F&O contracts that took place in India becomes 52.4%. With virtually every expert in India’s financial landscape such as Sebi chairperson, chief economic advisor to the government of India, NSE chief to the Union finance minister herself repeatedly failing to rein in retail investors, market regulator Sebi is now going to usher in tighter norms for trading in derivatives on stocks.
Sebi has floated a discussion paper – a precursor to change in policies – on its website expressing the view that derivatives contracts on individual stocks must have sufficient liquidity. Also, market participants must be interested in those stocks. These requirements are presently enforced only in case for contracts on indices.
Derivaties investment: India at top
While in 2023, India virtually monopolised the world of derivatives with 85.3 per cent no country other than the US could manage a share of even 3 per cent. About 2.4 per cent of the F&O contracts happened in Brazil while South Korea, Canada, Hong Kong, Taiwan, Russia and Germany all accounted for less than 1 per cent.
Between 2013 and 2023, only the US (10.7%) and Brazil (10.2%) accounted for more than 10%. Canada (9.7%), Hong Kong (8.8%), South Korea (3.8%), Russia (1.3%) and Germany (0.9%) were miles behind the share of contracts that happened in India (52.4%).
F&O trading: Sebi’s concern
“Without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection,” SEBI said.
Laying down new guidelines for eligibility of a stock for F&O trading, the market regulator has said that it should have traded for 75% of trading days. However, Sebi has not yet demarcated the time period over which the trading days would be considered.
Sebi has also stated that at least 15% of active derivatives traders should have traded in the stock and that average premium daily turnover should be at least Rs 150 crore. Simultaneously the average daily turnover of the individual stock must be between Rs 500 crore and Rs 1,500 crore. Furthermore, the highest number of open F&O contracts permitted for that particular stock must be between Rs 1,250 crore and Rs 1,750 crore. But the market regulator did not clarify about the time periods applicable.
Exits and entry
Once these are enforced, the new guidelines could result in the exit of several stocks.
While there is a discussion of about six dozen stocks such as LIC and Zomato becoming eligible for the F&O segment, IIFL research has stated that about 25 stocks could be filtered out by the new guidelines that Sebi has proposed.
Finance minister’s caution
Only in the second week of May, did Nirmala Sitharaman say in an event in Mumbai that unbridled F&O trading could have ominous portents of the economy. “An unchecked explosion in retail trading in the futures and options market can create future challenges for the market, investor sentiment, and household finances,” she remarked.
In February, Ashishkumar Chauhan, the managing director and chief executive officer of NSE expressed the same sentiments.
“Avoid the pitfalls of high-risk derivatives or frequent trading in the stock market. Be a committed participant in India’s growth story, and pave the way for a brighter future. Long term investments usually yield better results based on past experiences,” he said.
Sebi has proposed a guideline on which stocks can be eligible for derivatives trading. It follows an unprecedented surge of F&O trading in India and over the past few years that prompted all leading experts of the financial world, including Union finance minister Nirmala Sitharaman, to highlight the dangers of retail investors risking their funds in this speculative domain. Markets Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
