'Not throwing baby out with bathwater': Sebi's Ananth Narayan clears the air on F&O move
Narayan clarified that the recent guidelines issued by the regulator are only to curb the frenzy during expiry day.
- Aug 3, 2024,
- Updated Aug 3, 2024 9:12 AM IST
Sebi is targeting speculative trading in the Rs 450-trillion-a-day futures and options (F&O) market, but it is also making sure it doesn't "throw the baby out with the bathwater", the regulator's whole-time member Ananth Narayan said at the 21st FICCI Annual Capital Markets Conference.
Narayan clarified that the recent guidelines issued by the regulator are only to curb the frenzy during expiry day. "We only propose to specifically address the issue of hyperactive trading on expiry day options and reset derivative lot sizes to account for movement in the market over time."
"When it comes to frenzied trading in options nearing expiry, it is difficult to see any baby in this bathwater," he told the audience.
Narayan said Sebi's measures aim to protect retail investors, who face annual losses exceeding Rs 50,000 crore in the F&O market. The proposed actions are immediate, with plans for more comprehensive measures over the medium term.
Narayan said 90% of trading in some futures and options contracts occurs in the final trading hours. During this time, speculators can make substantial profits from small capital outlays if the market moves just a few points, a scenario that has drawn many traders due to the low premium.
"Trading close to expiry can resemble a slot machine, hoping to hit the jackpot," he said.
One key focus is refining how positions in F&O are measured, moving from a notional turnover basis to a "future equivalent" or delta equivalent measure, providing clearer insights into actual exposure.
Additionally, Sebi is exploring the need for a connection between average daily delivery volumes in stocks and the maximum open future equivalent positions in their derivatives. This, along with other issues, will be subject to open discussions.
"Not taking timely steps can threaten the market goose that lays golden eggs," he warned.
Following expert recommendations, Sebi has proposed measures such as reducing the number of options strike prices, collecting options premiums upfront, significantly increasing minimum contract sizes, and reducing weekly expiries.
Narayan also highlighted the current mismatch between the supply and demand for securities. While Indian savers are increasingly becoming investors, bringing in Rs 3.1 trillion annually into the secondary market, the primary market issuance stands at only Rs 2 trillion per year. This imbalance could lead to asset price inflation rather than capital formation, as seen with over 30 percent of midcap and small stocks tripling in price over the past three years.
Sebi is targeting speculative trading in the Rs 450-trillion-a-day futures and options (F&O) market, but it is also making sure it doesn't "throw the baby out with the bathwater", the regulator's whole-time member Ananth Narayan said at the 21st FICCI Annual Capital Markets Conference.
Narayan clarified that the recent guidelines issued by the regulator are only to curb the frenzy during expiry day. "We only propose to specifically address the issue of hyperactive trading on expiry day options and reset derivative lot sizes to account for movement in the market over time."
"When it comes to frenzied trading in options nearing expiry, it is difficult to see any baby in this bathwater," he told the audience.
Narayan said Sebi's measures aim to protect retail investors, who face annual losses exceeding Rs 50,000 crore in the F&O market. The proposed actions are immediate, with plans for more comprehensive measures over the medium term.
Narayan said 90% of trading in some futures and options contracts occurs in the final trading hours. During this time, speculators can make substantial profits from small capital outlays if the market moves just a few points, a scenario that has drawn many traders due to the low premium.
"Trading close to expiry can resemble a slot machine, hoping to hit the jackpot," he said.
One key focus is refining how positions in F&O are measured, moving from a notional turnover basis to a "future equivalent" or delta equivalent measure, providing clearer insights into actual exposure.
Additionally, Sebi is exploring the need for a connection between average daily delivery volumes in stocks and the maximum open future equivalent positions in their derivatives. This, along with other issues, will be subject to open discussions.
"Not taking timely steps can threaten the market goose that lays golden eggs," he warned.
Following expert recommendations, Sebi has proposed measures such as reducing the number of options strike prices, collecting options premiums upfront, significantly increasing minimum contract sizes, and reducing weekly expiries.
Narayan also highlighted the current mismatch between the supply and demand for securities. While Indian savers are increasingly becoming investors, bringing in Rs 3.1 trillion annually into the secondary market, the primary market issuance stands at only Rs 2 trillion per year. This imbalance could lead to asset price inflation rather than capital formation, as seen with over 30 percent of midcap and small stocks tripling in price over the past three years.