Sebi Aims to Curb Expiry Day Frenzy in Options Trading

Mumbai, Aug 2 (PTI) Sebi Whole Time Member Ananth Narayan G on Friday said that the "primary intent" of the capital markets regulator in trying to restrict derivative trades is to curb "expiry day frenzy" in options trading.

Replying to the critique of the seven-point proposals released earlier this week, where people warn about throwing the baby with the bath water, Narayan wondered if there is any baby in it at all, and made it clear that it is not Sebi's intent to ban derivatives.

Speaking at the annual Capam event organised by FICCI, he also flagged the issues of a consistent mismatch between demand and supply of securities for many years and urged the industry to step up on this front.

"Primary regulatory intent now is to specifically curb only this expiry day frenzy in options trading, and to reduce the systemic risks around this," he said, speaking of the consultation paper put out by Sebi to restrict F&O activity earlier this week.

Narayan said five of the seven proposals in the July 30 consultation paper are focused on this objective, including restricting the number of weekly option expiries, increasing margins around expiry day, removing the benefit of calendar spreads on expiry day, requiring the monitoring of intraday positions, and rationalization of options strikes.

"As a regulator, we are conscious that we must not throw the baby out with the bathwater. When it comes to the frenzied trading in options nearing expiry, however, it is very difficult to see any baby in this bathwater," he said.

Explaining the concerning activities, he said there are contracts where well over 90 per cent of the trading volume in index options occurs on the expiry day, with a significant concentration in the last hour of trading.

"Trading in index options 'specifically close to expiry - then starts to resemble a slot machine in a casino, with individuals putting coins into the machine, hoping to hit the jackpot," he said, making it clear that all F&O is not like slot machine and it is the options trading in the final hours ahead of expiry is what concerns the Sebi.

Quoting data from NSE, he said over 92 lakh individuals collectively lost Rs 51,869 crores during FY24 in index derivatives, even without considering their transaction costs, and added that 99 per cent of these individuals traded in index options.

"This frenzied hyperactivity in index options on expiry day has little discernable benefits while raising several issues," he said.

"It would require extreme levels of imagination to be able to attribute any kind of constructive support for market-wide price discovery, hedging, or capital formation from this hyperactivity in index options on expiry day," he added.

Narayan also warned that if there were a black swan global market moving event minutes before expiry, the resultant impact on the overall market ecosystem could be "substantial".

The capital markets regulator will continue to monitor activity in F&O markets in the future, and in a consultative fashion, consider fresh steps as necessary.

Invoking the capital formation argument, Narayan said the net trading loss borne by individuals in FY24 in index derivatives is nearly a third of the net inflows into Growth and Equity-oriented schemes of all Mutual Funds during the fiscal year.

There is a mismatch between the demand for securities and the supply of securities, he rued, pointing to Rs 3.1 lakh crore of net demand for paper brought in by mutual funds, domestic institutional investors and individuals into the secondary market every year in the past three years far exceeds the roughly Rs 2 lakh crore of annual primary market issuances across various routes.

"We need issuers including many members of FICCI - to step up to the opportunity, raise risk capital from our willing investors, deploy it and create new businesses and household savings, and hence ensure that capital formation sustains as a virtuous cycle," he said.