BackSebi may raise bar for derivatives trade
Market regulator has expressed concerns on retail investors participating in F&O segment
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Mumbai: Market participants are divided on the possible impact of the capital market regulator’s recent decision to review the contract size of equity derivative instruments, which have seen a massive spike in turnover in the past few years, leading to regulatory worries especially in the context of retail investors.
The Securities and Exchange Board of India (Sebi) sought exchanges’ views on whether the minimum contract size in the derivatives segment should be increased from the current ₹ 2 lakh to either ₹ 5 lakh or ₹ 10 lakh, according to a report published in The Economic Times on 18 May.
Derivatives trading in stocks and indices refers to the availability of futures and options (F&O) contracts with a particular stock or an index as the underlying measure. Both the National Stock Exchange of India Ltd (NSE) and BSE Ltd have a vibrant F&O segment, with the former cornering the lion’s share.
The issue of minimum contract size is a sensitive one as exchanges often boast of large turnovers in the derivatives segment and any increase in the minimum lot size is bound to have an impact on turnover.
NSE features among the world’s largest exchanges in terms of turnover in the F&O segment, as per data from the World Federation of Exchanges. NSE’s F&O segment clocked an average daily turnover of ₹ 3.07 trillion in April, while that of BSE was pegged at ₹ 20,851.66 crore.
A section of market participants is in favour of a higher contract size and cites the argument that retail investors, attracted to the segment without understanding its complexities, incur heavy losses. Hence, a higher entry barrier.
“It will be a progressive step by Sebi. A higher contract size will impact retail investors and if they move out then obviously the turnover will be hit. But high networth individuals will still be there along with institutions. It is better to have limited access to F&O," said Bhavin Desai, equity derivatives analyst at Motilal Oswal Financial Services Ltd.
To be sure, the popular Nifty futures contract that is traded on Singapore Exchange (SGX) is an instance of a successful derivative instrument with a high contract value. Each Nifty contract on SGX is valued nearly ₹ 11 lakh in rupee terms.
Sebi too has expressed concerns on retail investors participating in the F&O segment and the ongoing review is part of the process to restrict their entry. On numerous occasions, Sebi chairman U.K. Sinha has cautioned that complex products, including derivatives, should not be sold to uninformed investors who do not understand the risks of such products.
In November 2012, Sebi had barred exchanges from offering mini derivative contracts that were essentially launched to get more retail investors into the F&O space.
Responding to an email query, a BSE spokesperson said the issue of small-investor protection needed to be of paramount importance in making any decision in this regard. “The potential for mis-selling and the suitability of products for a particular class of investors should be kept in mind while revising derivative lot sizes. The South Korea example should be considered (while deciding) derivative lot size," he said, referring to the decision of the Korean exchange to increase contract size fivefold.
Email queries sent to Sebi, NSE and the Metropolitan Stock Exchange of India (MSXI)—formerly known as MCX Stock Exchange of India Ltd (MCX-SX)—remained unanswered.
Siddharth Bhamre, head of equity derivatives and technicals at Angel Broking Pvt. Ltd, took a contrarian view. He said one could not look at global contract sizes in isolation as purchasing-power parity differed across countries. “The F&O segment is made for hedging and it is not advisable to put barriers only because some use it for speculation. Increase in the minimum contract size will be an anti-retail move and will impact liquidity. A better option will be to educate investors and target those who indulge in mis-selling," Bhamre added.
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