SEBI amendments on F&O trading and it's impact

Derivatives are the instruments created to overcome the risk factor. But nowadays the traders are using this tool to speculate. Now this over speculation in the index has created a lot of loses of investors. Nine out of ten traders make losses in the derivative market in which most of them are retail investors. So, to overcome this, the government and SEBI are taking various measures to decrease the participation of the retailers and safeguard the interest of the general public who looses money in the market.

SEBI’s proposal have major 7 points which addresses the risk and challenges on the index derivatives. By this measures the SEBI intents to reduce the risk and enhance the retail protection and promote market stability by reducing excessive speculation in the market.

The first measure is to rationalize the option strike. Which will bring uniformity to keep the premium to 4% of the index spot price. This is though not feasible due to demand and supply gap. Further SEBI propose the upfront collection of the option from the option buyer and this could be a welcome from the general market. This move will ensure the upfront collection of the margin very good which will help to ensure a smooth transaction during the expiry. SEBI also proposes to remove the margin benefit for the calendar spread, position spread involving any other contract expiring on the same day. This will not have a major impact on the investor only the few traders will face little impact. SEBI has also directed the stock exchange and clearing corporation to monitor the position limit for index derivatives. 

SEBI is also looking forward to increase the minimum corpus to enter in the index contract at the time of introduction to 15-20 lakhs. In second phase it can go to 20-30 lakhs in another six months. Now the retail investors entering into the contract with few thousand rupees will not be able to enter with such less money. There will be no major impact in the index option as the contract will be traded on their level, but the retail participation will get wiped out. They are also looking to reduce the weekly option contract and to provide a single benchmark index of the exchange. This reduction is justifiable though it may have negative impact on the investors who are able to earn a decent amount.

Therefore, the above points from the consultation paper are aiming towards safeguarding the retail participants and stabilize the market. 

Thank you.

 Regards,

Tushar Bangar,

Kautilya, IBS Mumbai.