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In a move to weed out anomalies in the derivative segment, SEBI has sought comments from market participants to further strengthen the framework in line with the emerging trends and global best practices.
Comments were sought by August 10 on issues relating to trading in derivatives, participant’s profile, product mix, stock eligibility, leverage-related matters and product suitability framework.
According to SEBI, trading turnover in derivatives has seen a sharp surge of over ten-fold over the past decade, and the ratio of trades in equity derivatives to that of cash market has risen to over 15 times. “To what extent the drivers of this ratio in India are comparable with drivers in other markets,” SEBI note asks. For FY16-17, equity derivatives turnover is largely dominated by index options which contributed 77.14 per cent to the total turnover, followed by stock futures at 11.79 per cent, stock options at 6.47 per cent and index futures at 4.60 per cent.
Capability to withstand risksWhile large number of individual investors are active in derivatives segment, the regulator noted that these investors may or may not have adequate financial capability to withstand risks posed by complex derivative instruments.
The discussion paper also sought suggestions to create balanced participation in equity derivatives market and what could be the guiding principles for setting minimum contract size and open position limits for equity derivatives, considering the participants’ profile and other factors.
The proprietary trades — trading by stock brokers on their proprietary account — contribute up to 55 per cent of total trading volume in index options. Non-institutional, non-proprietary category, which includes individual investors, and proprietary category together contributed around 85 per cent of the total trading volume in index options. In case of stock options, they account for around 80 per cent.
SEBI also wants to review existing criteria for introduction of derivatives on stocks or on indices and whether the present margin frameworks, as also trading and risk management frameworks, require any changes.
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