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The Securities and Exchange Board of India (Sebi) has proposed a series of measures aimed at curbing speculative trading in index derivatives, reflecting growing concerns about the risks associated with this market segment. The regulator's proposed changes include revising the minimum contract size, requiring upfront collection of option premiums, and implementing intra-day monitoring of position limits, among other measures.
The move comes in the wake of a sharp increase in retail investor participation in derivatives trading, a trend that has raised concerns about the potential for excessive speculation and market instability. In its consultation paper, Sebi highlighted the need to enhance investor protection and promote market stability within the derivatives market, particularly as individual traders have been shown to face significant losses.
The regulator's proposed revisions to the minimum contract size are intended to restrict access to derivatives trading for smaller investors and potentially discourage speculative behavior. The minimum contract size for index derivatives would be revised in two phases, starting with a minimum value of Rs 15 lakh to Rs 20 lakh, gradually increasing to Rs 20 lakh to Rs 30 lakh after six months. This move is intended to discourage speculative activity by making it more expensive for smaller players to participate in the market.
Sebi's proposal to require upfront collection of option premiums from clients is another measure aimed at reducing leverage and mitigating potential losses. This would prevent traders from engaging in excessively leveraged positions, thereby reducing the risk of large losses for individual investors.
The regulator's proposal to rationalize strike prices is intended to reduce the complexity of options trading and improve market efficiency. By standardizing strike intervals and limiting the number of strikes available, Sebi aims to reduce the potential for market manipulation and improve price discovery. The proposed intra-day monitoring of position limits is aimed at identifying and mitigating potential instances of excessive speculation by individual players. This monitoring system would allow clearing corporations and stock exchanges to intervene and take appropriate measures to prevent market instability.
While derivatives markets can serve valuable functions, such as facilitating price discovery and risk management, the potential for speculative activity can pose significant risks to both investors and the overall financial system. Sebi's proposed measures are intended to strike a balance between fostering innovation and growth within the derivatives market while protecting investors and ensuring market stability.
Source: Sebi mulls measures to curb speculative trading in index derivatives, ET LegalWorld