Sebi Proposes Steps to Strengthen Index Derivatives Framework

New Delhi, Jul 30 (PTI) Sebi on Tuesday proposed various measures, including revision in minimum contract size and collection of option premiums on an upfront basis, to strengthen the index derivatives framework.

The move is aimed at curbing speculative trades in the derivatives segment as well as protecting investors' interest.

Other proposed measures include rationalisation of weekly index products, intra-day monitoring of position limits, rationalisation of strike prices, removal of calendar spread benefit on expiry day and increase in near contract expiry margin.

Considering the growth witnessed in the broad market parameters, the minimum contract size for index derivative contracts should be revised in two phases, Sebi said in its consultation paper.

Under phase 1, the minimum value of derivatives contract at the time of introduction should be between Rs 15 lakh and Rs 20 lakh. In phase 2, after 6 months, the minimum value of derivatives contract is to be between the interval of Rs 20 lakh and Rs 30 lakh.

The minimum contract size requirement for derivative contracts (Rs 5 lakh to Rs 10 lakh) was last set in 2015

These proposed measures are aimed at enhancing investor protection and promoting market stability in derivative markets while ensuring sustained capital formation.

Derivatives market assist in better price discovery, help improve market liquidity and allow investors to manage their risks better.

"However, bursts of speculative hyperactivity in derivative markets, particularly by individual players, can detract from sustained capital formation by endangering both investor protection and market stability," the markets regulator noted.

A study by the Securities and Exchange Board of India (Sebi) revealed that 89 per cent of individual traders in the equity F&O segment suffered losses, with average losses of Rs 1.1 lakh in FY22.

Additionally, there was an exponential increase in the F&O segment participation during the pandemic, with the total number of unique individual traders increasing by over 500 per cent from 7.1 lakh in FY19 to 45.24 lakh in FY21, the study noted.

Futures and Options trading involves contracts that derive their value from an underlying asset, such as stocks or commodities. Futures contracts obligate the buyer and seller to transact at a predetermined future date and price, while options give the holder the right, but not the obligation, to buy or sell the asset at a set price within a specific period.

These financial instruments are used for hedging risks, speculating on price movements, and arbitraging price differences. However, they come with significant risks, including leverage risk and market volatility, which can lead to substantial losses.