Sebi Proposes Big Changes to Derivatives Trading

The Securities and Exchange Board of India (Sebi) is stirring things up in the world of derivatives trading. The regulator is suggesting a significant hike in the minimum contract size for index derivatives, potentially making things a little tougher for small investors.

According to a recent consultation paper from Sebi, the minimum value for a derivatives contract could rise to between Rs 15 lakh and Rs 20 lakh when it’s introduced. After six months, this could increase even further to between Rs 20 lakh and Rs 30 lakh. For comparison, the current minimum is around Rs 5 lakh, so this is quite a leap.

The goal behind this move seems to be clear: Sebi wants to raise the entry barrier for small investors into the derivatives market. With the futures segment already having a higher threshold compared to the options segment, it seems Sebi is trying to guide traders towards less risky choices.

Interestingly, the popularity of index options has skyrocketed. They now account for 29% of the overall turnover in the futures and options (F&O) market, which is a massive jump from just 5% back in FY20. But the share of index futures has dropped to 15%, down from 29% over the same period.

These changes come right after the government announced an increase in the securities transaction tax (STT) on options and futures, which might just make options trading even more attractive. Nithin Kamath, the founder and CEO of Zerodha, believes these adjustments will prompt futures traders to shift towards options. He notes that futures traders have better success rates compared to those buying options.

On the options side, Sebi is gearing up for stricter regulations. Some proposed changes include requiring the upfront collection of option premiums from buyers, which could help reduce leverage and possibly curb risky trading behaviors.

Deepak Shenoy, another expert in the field, highlights that many traders might gamble on low-cost options, hoping for big gains on expiry days. This presents a risk, especially when sellers aim to profit by collecting premiums from those speculating on unlikely moves.

To put things in perspective, trading in equity can be categorized into cash and derivatives. While cash trading is straightforward, derivatives trading involves more complexity. In FY24, the cash market turned over an impressive Rs 217 trillion, while derivatives clocked a whopping Rs 482 trillion.

SEBI is expressing concerns as studies reveal that a staggering 90% of trades in the F&O segment lead to losses. It aims to intervene and stabilize the market, especially to protect smaller investors from significant financial pitfalls.