SEBI's F&O Norms: Protective, Not Very Restrictive For Retail Investors

In recent months, the Securities and Exchange Board of India, the RBI Governor, and the latest Economic Survey have all criticised the explosive growth in futures and options trading. 

In response, the Union budget had increased the securities transaction tax to address the rising retail interest in these risky derivatives. Now SEBI has done its part by floating a consultation paper, which propose stricter rules.

But, to what extent are these rules going to restrict retail investors?

As per the proposed rules, the regulator plans to raise the minimum contract size from Rs 5 lakh to between Rs 15-20 lakh. Additionally, the extreme loss margin will increase by 3% before expiry day and by 5% on expiry day. Members must collect option premiums upfront from clients. 

By requiring traders to pay premiums upfront, SEBI prevents retail investors from taking on too much risk, which could result in big losses, said Sanjay Israni, partner at Desai & Diwanji. This rule ensures that investors use their own money for trading, making it safer, he said.

Further, as per the consultation paper, strike interval will be standardised to cover 4% around the current index price, with fewer strikes introduced further away from this price.

By doing this, SEBI seeks to reduce market volatility and make it more predictable, so that retail investors avoid sudden price swings and potential manipulation, said Israni.

According to Kinjal Champaneria, partner at Solomon & Co., the price swings will be curtailed by limiting free flow of movement of price in a contract, coupled with increase of financial obligation for retail investors.

Initially, no more than 50 strikes will be allowed, and new strikes will be introduced daily to meet these requirements, the consultation process has proposed.

While the rules do not bar investors from investing in F&O segment, these rules would prevent retail investors from overleveraging and limit the risk, said Moin Ladha, partner at Khaitan & Co. 

This would disincentivise retail investors from taking positions in the market beyond the collateral available, he said.

On July 19, SEBI Chairperson Madhabi Puri Buch highlighted at an event that many young investors have lost significant amounts of money in the market. She noted that household savings are increasingly being used for speculation rather than productive investments. 

On Tuesday, just a couple of hours before the consultation paper was announced, Buch said at another event that losing Rs 50,000-60,000 crore of household savings through derivatives is a major concern. She emphasised that this money could be better used in IPOs, mutual funds, or other productive areas of the economy.

While SEBI's new suggestions might seem to exclude smaller investors, they actually aim to ensure that only those who can handle potential losses are involved in this type of trading, said Israni.

The capital markets regulator has invited comments on the paper by August 20.