SEBI Tightens Rules On Futures & Options Trading To Protect Retail Investors

The Securities and Exchange Board of India (SEBI) has introduced a series of reforms aimed at reducing speculative trading in the futures and options (F&O) market.

This move comes in response to alarming data showing that nine out of ten retail participants in the F&O segment have suffered significant losses over the past three years.

One of the key measures announced by SEBI is an increase in the minimum contract size for index derivatives.

The minimum contract size however will now rise to Rs 15 lakh from the current Rs 5 lakh.

This change is to discourage smaller, more vulnerable investors from engaging in high-risk trading.

In addition, SEBI has limited the number of weekly expiries allowed per exchange.

Going forward, exchanges will only be permitted to offer one weekly expiry for a single benchmark index.

The decision aims to address the problem of excessive trading on expiry days, which has led to increased market volatility and significant losses for retail traders.

SEBI Clarifies Changes To Index Derivatives Trading Rules

SEBI explained the rationale behind the change in a circular: “To tackle the issue of excessive trading in index derivatives on expiry day, we have decided to streamline the derivatives products offered by exchanges. From now on, each exchange can offer weekly expiry contracts on only one of its benchmark indices.”

These actions are however part of a broader effort by SEBI to address the heavy financial losses faced by retail investors in the F&O market.

According to a recent SEBI report, over the past three years, 1.10 crore traders have collectively lost Rs 1.81 lakh crore in the F&O segment, with only 7% of participants managing to make a profit.

As part of the new regulations, the size of derivatives contracts for major benchmark indices, such as Nifty and Sensex, will increase from the current range of Rs 5 lakh to Rs 10 lakh, up to Rs 15 lakh to Rs 20 lakh.

This adjustment will take effect for all new contracts launched after 20 November 2024.

The Indian derivatives market has grown rapidly in recent years, with SEBI noting that the turnover in the derivatives market has surpassed that of the cash market.

A SEBI report published in July highlighted that India now accounts for 30-50% of global derivatives trading.

Data from FY 20 to FY 24 shows that cash market turnover in India has doubled, while the turnover of index options has skyrocketed by 12 times, reaching Rs 138 lakh crore in FY 24, compared to Rs 11 lakh crore in FY 20.

With these reforms, SEBI aims to create a safer and more stable trading environment for retail investors, many of whom have faced significant financial hardship in the high-risk F&O market.

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