SEBI to float consultation paper on F&O norms

The Securities and Exchange Board of India may soon float a consultation paper outlining steps to curb retail frenzy in F&O trading.

This follows a meeting of the regulator’s 17-member Secondary Market Advisory Committee (SMAC) on Monday to discuss proposals put forth by an expert panel led by former Reserve Bank of India Executive Director G Padmanabhan.

The proposals include increasing the minimum lot size from ₹5 lakh to ₹25 lakh, restricting weekly options to one expiry per stock exchange per week, limiting the number of strike prices for options contracts, higher upfront margins, monitoring of intra-day position limits, increasing margin requirements closer to expiry and removal of calendar spread benefits on expiry day.

“The SEBI committee has partially recommended some of the measures and are in agreement for a 4-5x increase in lot size. The regulator will now invite wider discussions for most of the recommendations through a consultation paper,” said a person familiar with the matter.

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It is not clear if the regulator will further tweak some of these proposals before including them in a consultation paper. The proposals may be further taken up by the SEBI Board before a final decision on the norms is reached.

Potential impact

More than 75 per cent of traders in the options segment have a turnover of less than ₹10 lakh every month. So, increasing the capital requirement could make trading unaffordable for the retail segment. Options trading has a high skew, given that about 20 per cent of retail option traders likely drive 90 per cent of premiums.

The proposals, if implemented, could curb also impact the profitability of high-ticket players such as algo firms and wealthy individuals due to higher margin requirements and position limits.

Regulatory interventions in the past had a crushing and lasting impact on volumes in Korea (options) and in China (futures). Recently, the RBI’s interventions in the currency derivatives market caused a major upheaval, leading to a sharp decline in volumes.

Options trading under close watch

Among the available alternatives to trade equities (intraday, delivery, futures and options), options are by far the most complex product and yet has the lowest cost both in terms of ticket size and transaction costs, with the highest leverage to the underlying spot.

“The debate around regulating options often deflects into the relevance of average losses. However, the key issue is not as much about average or median losses as much about the accessibility of a complex product with a very high probability of incurring losses,” said a recent note by Kotak Institutional Equities.

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