The Securities and Exchange Board of India (SEBI), the country’s stock market regulator, is considering stricter rules to curb trading in a risky market segment known as derivatives. According to a recent report, a committee set up by SEBI has proposed several measures to bring down the volume of derivative trades.
SEBI is worried about a recent surge in derivative trading, particularly among small investors. These markets can be very volatile, meaning prices can swing wildly. This volatility can lead to heavy losses for people who don’t fully understand the risks involved.
The SEBI committee has suggested a few changes to cool down the derivatives market. Here’s a breakdown of the key proposals in easy terms:
- Bigger Bets: Currently, the minimum amount required to enter a derivative contract is ₹5 lakh. The committee wants to raise this significantly, to a range of ₹20 lakh to ₹30 lakh. This would make derivatives a less attractive option for small investors with limited capital.
- Fewer Choices: Presently, there are many different types of derivative contracts available, with various expiry dates and strike prices (the price at which you agree to buy or sell the underlying asset). The committee proposes limiting these choices, making the market less complex.
- Limited Weekly Options: Currently, options contracts (a type of derivative) can expire on weekdays. The proposal suggests restricting weekly options to just one expiry per stock exchange, per week. This would reduce the number of trading opportunities and potentially lower overall activity.
If implemented, these proposals could significantly impact the derivatives market. The higher minimum investment amount would effectively shut out many small traders. Additionally, fewer contract options and limited weekly expiries could make the market less appealing overall.
Final Thoughts
SEBI’s move reflects a concern about protecting investors, especially those new to the market, from the potential dangers of derivatives. While these proposals might restrict some trading activities, they aim to promote a more stable and responsible derivatives market in India.