Don't generalise derivatives; AI technology is inevitable, says Sebi chief Tuhin Kanta Pandey

Securities and Exchange Board of India (Sebi) Chairman Tuhin Kanta Pandey on Monday said derivatives should not be seen negatively in their entirety, emphasising that regulatory concerns are restricted to a select segment. He also stated that artificial intelligence (AI)-driven trading is inevitable but must be accompanied by accountability.

"So, I would like to really make a point here that I think we should not really talk in general terms of derivatives," Pandey told Business Today.

He explained that derivatives include different instruments and most of them function well. "Derivatives include a variety of instruments. We have futures where we don't actually see many problems. It was only in a very limited portion of options, and that too short-dated options, where we had this hyperactivity, which was noticed and where we had curbing measures. Therefore, I think it's important to understand that derivative markets are important for liquidity and price discovery, and indeed they are quite integral to cash markets too," he said.

Pandey said Sebi's action was based on data that showed excessive activity in short-dated options. He added that this trend picked up after the Covid-19 pandemic.

"We found also that this was a post-Covid phenomenon where a lot of false educationists and misleading influencers have given a feeling that, you know, this is a market to get rich very quickly," he said. The Sebi chief noted that some people earned money by offering training courses without properly warning investors about the risks. "They have also made a lot of money while you know taking training courses from the people, not really warning the people about the risks which are inherent there in these markets."

To address the issue, Sebi published data highlighting the risks and introduced safeguards. "What we did when we put out this data was to make that known to everyone that these are riskier markets. We also introduced statutory pop-ups," he said.

Pandey also underlined the importance of other derivative segments. "We do have commodity derivatives, which are very important and growing, and we should also develop those markets further and in many areas, for example, bond indexes and derivatives," he said.

On AI-driven trading, Pandey said technology is unavoidable, but accountability is essential. "AI technology is inevitable. But then there has to be human validation at the end of the day, and there has to be a responsibility which has to be taken. You can't blame it on technology," he said, adding that regulations will evolve as discussions continue with industry participants.