The Securities and Exchange Board of India (SEBI), has proposed revising the guidelines for trading in individual stock derivatives.
Through a consultation paper issued on Saturday (8 June, 2024), SEBI highlighted concerns about heightened risks of market manipulation, increased market swings, and potential harm to investors.
Over the past five years, options trading in India has surged, largely driven by individual investors. The National Stock Exchange (NSE) declared that the notional value of index options traded more than doubled in the fiscal year 2023-24, reaching $907.09 trillion, compared to the previous year.
SEBI further highlighted that derivatives contracts for individual stocks should possess ample liquidity and attract trading interest from market participants. This requirement is currently only mandated for contracts linked to indexes.
“Derivative markets enhance price discovery and market liquidity. However, 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,” said SEBI in the consultation paper.
According to the proposed regulations, for a stock to qualify for futures and options (F&O) trading, it must have been traded on 75% of trading days, as outlined by SEBI. However, SEBI did not specify the timeframe for this requirement.
Additionally, the stock should have seen trading activity from at least 15% of active derivatives traders. The average premium daily turnover should amount to Rs 150 crore ($18 million), with the average daily turnover falling between Rs 500 crore and Rs 1,500 crore.
SEBI also declared that the maximum number of open F&O contracts allowed for the underlying stock should range between Rs 1,250 crore and Rs 1,750 crore. Once again, SEBI did not specify any specific time periods for these criteria.
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In 2023, out of the 108 billion options contracts traded globally, Indian exchanges accounted for 78%, according to data from the Futures Industry Association. Retail investors contribute to 35% of derivative trading in the country.
Financial services firm IIFL, in a research note, suggested that up to 25 out of the 182 stocks currently available for futures and options trading could become ineligible if the regulator’s proposed changes are enforced.
A discussion paper marks the initial stage in the process of Indian regulators revising policies or rules.
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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing.
