In a bid to tighten control over the burgeoning retail Futures & Options, F&O trading, market regulator SEBI (Securities and Exchange Board of India) has established a working group to enhance investor protection and improve risk management in equity derivatives. As reported by Moneycontrol.
The 15-member group is led by former RBI (Reserve Bank of India) Executive Director G Padmanabhan and includes representatives from the market ecosystem such as exchanges, brokers, clearing corporations, mutual funds, a major corporate house, and academic experts in finance and risk management from the Indian Institutes of Management (IIMs).
The working group’s terms of reference involve suggesting both near-term and medium-term measures to:
- Enhance investor protection in exchange-traded derivatives (ETDs).
- Improve risk metrics and risk architecture of ETDs to bolster market development and regulation.
India has recently witnessed a significant surge in retail participation in the derivatives market, which has raised concerns among government and regulatory bodies about potential widespread losses if a market crash occurs. Authorities have frequently expressed concerns about the increasing involvement of retail investors in derivatives trading, fearing significant financial losses for these traders in a declining market.
Last week, RBI Governor Shaktikanta Das mentioned that the RBI, along with SEBI, is closely monitoring the surging equity derivatives volumes, which have now surpassed the nominal GDP of the country.
The number of futures and options (F&O) traders in India increased five-fold from FY19 to FY22. According to the Futures Industry Association, India’s National Stock Exchange (NSE) and BSE are now the top two stock exchanges globally in terms of the number of derivatives contracts traded, accounting for nearly 85% of the global volume.
In May, Finance Minister Nirmala Sitharaman warned that the rapid increase in retail F&O trading could negatively impact investor sentiment and household finances.
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