Sebi move may spoil F&O party for retail investors

MUMBAI: A regulatory proposal to raise the entry bar for trading in equity derivatives could shut retail and even rich investors out of the market. The move is ostensibly aimed at preventing individuals from making themselves vulnerable to high-risk speculation but critics say any such change would make trades expensive, kill off volume and restrict the market to institutions.

The Securities and Exchange Board of India (Sebi) is considering to increase the minimum contract size for stock and index derivatives to either Rs 5 lakh or Rs 10 lakh from the existing Rs 2 lakh. It recently wrote to stock exchanges seeking their views about the impact it could have on turnover and participation. If implemented, the National Stock Exchange (NSE) will be hit the worst as most retail investors and high networth individuals (HNIs) trade in its derivatives segment.

One of the attractions of derivatives trading, mainly futures, is the ability to bet big on a stock by depositing less than a fifth of the total contract value.


But the flipside in futures is that the trader, in theory, faces unlimited losses if bets go awry.

Exchanges are said to have sent their feedback on the proposed move to Sebi. While NSE and MCX-SX are against the proposal, the Bombay Stock Exchange is in favour of it, people aware of the responses said. The exchanges and the regulator couldn’t immediately be reached for comment.

MULTIPLE PROBLEMS

An exchange executive opposed to the move said it would create multiple problems.

“The biggest challenge is liquidity, which is critical, will go down and impact institutions’ ability to hedge their positions as cost of hedging will go up, which in turn would lead to increase in overall cost of trading and thus affecting the cash market,” the person said. Another official said the move was “anti-competitive” and would drive large volumes to the illegal ‘dabba’ or off-market trade. Brokers and analysts expect the move to make the equity derivatives market less active.

“It will kill volumes and will become an institutional market,” said Vijay Kanchan, a professor of finance and a derivatives specialist.

“Even the larger HNIs will find it expensive to trade in futures and options in India.” More than half the market activity is focused on contracts that are below Rs 5 lakh in size, according to estimates.

“The current contract size is working fine,” said Vikas Khemani, president and co-head, wholesale capital markets, Edelweiss. “By increasing it, you will discourage retail participation. The Idea should not be to make it difficult but create awareness.”

This is the first time in 15 years that Sebi is proposing a review of the minimum contract size. The value of a contract is calculated by multiplying the futures price with the number of shares that should amount to Rs 2 lakh. The Nifty futures lot size is normally 25. The margin to buy or sell index futures is usually 10-15%.

Sebi previously discontinued mini futures and options contracts as part of a bid to dissuade small investors from entering the derivatives segment.