Mumbai: The Securities and Exchange Board of India (Sebi) is examining whether investors are knowledgeable and capable enough to bear the risks posed by derivative instruments.
In a discussion paper released on Wednesday, Sebi said it is considering a product suitability framework to ensure that individual investors have a safety net. This might take the form of differential contract sizes and open positions, the paper indicated.
The paper commented on the fact that turnover of equity derivatives markets in India was 15 times that of the cash market—which suggests excessive speculation. “To what extent the drivers of this ratio in India are comparable with drivers in other markets?" Sebi wondered.
A product suitability framework is a mechanism that allows investors to invest in certain market instruments based on their profile, the paper said. It didn’t specify how this profile would be defined in terms of risk appetite, knowledge and so on. “It is good that the regulator is addressing excessive speculation in a systematic manner. Equity (markets/trading) cannot just rely on speculation, there has to be accompanying investment," said Deven Choksey, group managing director at KR Choksey Investment Managers Pvt. Ltd.
Sebi said it is also examining whether margins, trading and risk management framework for derivatives and present norms for introduction of derivatives on stocks or derivatives on indices must be reviewed.
“Product suitability as a framework is a noble objective. However, the issues would be around implementation. This can happen when the market and regulator talk face-to-face," said Choksey.
Market participants can offer their comments by 10 August.
“Product suitability based on customer profile may be difficult as the it would put the onus on the broker to identify and screen investor profile. The reason why turnover figures look higher is due to proprietory trading and speculation whereas participation remains low. Higher participation is achievable if the entry barriers are reduced," said Prakarsh Gagdani, CEO, 5paisa Capital, a low cost brokerage unit of IIFL Holdings.
In certain nations, individuals trading in derivatives must have minimum qualification to do so, the paper pointed out.
In India, trading members (brokers) need to employ salespeople who have passed a certification programme approved by Sebi to operate in the derivatives market.
Sebi data shows options dominate trading in the derivatives and account for 83.61% of total trading in derivative segment. Proprietary trades and individual investors contribute 43% and 26% respectively of the total volume of equity derivatives in India.