SEBI tightens F&O vigil, forms panel for risk management, investor protection in equity derivatives

India has seen a remarkable surge in retail equity F&O trading.

In yet another step to tighten the grip on ballooning retail Futures & Options (F&O) trading, market regulator SEBI (Securities and Exchange Board of India) has formed a working group to enhance investor protection and improve risk management in equity derivatives, a member of the group told Moneycontrol, requesting anonymity.

The 15-member group is headed by former RBI (Reserve Bank of India) Executive Director G Padmanabhan. It includes representatives from the market ecosystem, such as exchanges, brokers, clearing corporations, mutual funds, a major corporate house, and academic experts in finance and risk management from the Indian Institutes of Management (IIMs).

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The terms of reference for the working group include suggesting near-term and medium-term measures, in order to 1) enhance investor protection in exchange-traded derivatives (ETDs), and 2) improve risk metrics and risk architecture of ETDs, with a view to enhance market development and regulation.

Also read: RBI, SEBI closely monitoring high F&O trading volumes

Of late, India has seen a remarkable surge in retail participation in the derivatives market, raising concerns among the government and regulators about potential widespread losses in the event of a market crash. Authorities have repeatedly expressed apprehensions about the growing involvement of retail investors in derivatives trading, fearing significant financial losses for these traders if the markets decline.

Earlier, last week, Governor Shaktikanta Das said that the RBI, along with SEBI, is keeping a close watch on the surging equity derivatives volumes, which have now dwarfed the nominal GDP of the country.

Also read: SEBI proposes tighter rules for derivatives trading on individual stocks

The number of futures and options (F&O) traders in India increased five-fold from FY19 to FY22. According to the Futures Industry Association, India's National Stock Exchange (NSE) and BSE are now the top two stock exchanges globally in terms of the number of derivatives contracts traded, accounting for nearly 85 percent of the global volume.

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In May, Finance Minister Nirmala Sitharaman cautioned that the rapid rise in retail F&O trading could adversely affect investor sentiment and household finances.

Additionally, SEBI plans to discuss a proposal regarding eligibility criteria for single stocks to enter the derivatives segment in an upcoming board meeting. This proposal has already been reviewed by another SEBI committee, including members from stock exchanges and brokerage firms, who have evaluated comments on the matter.

SEBI had floated a discussion paper in early June, proposing that the derivatives contracts on individual stocks should have sufficient liquidity and trading interest from market participants – currently a requirement only for contracts on indexes.

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