BackSebi raises equity derivatives contract size to Rs5 lakh
The regulator seeks to limit participation of retail investors in the high-risk segment by raising the bar
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Mumbai: Capital markets regulator Securities and Exchange Board of India (Sebi) has decided to raise the bar for participation in the equity derivatives market, with a view to limiting the participation of retail investors in this relatively high-risk segment.
The minimum contract size in the equity derivatives segment will be increased to ₹ 5 lakh from the current minimum size of ₹ 2 lakh, Sebi said in a circular on Monday. While the regulator did not give a reason for the change, Sebi chief U.K. Sinha has in the past cautioned that complex products such as derivatives should not be sold to uninformed investors who do not understand the risk of such products.
Derivatives trading in stocks and indices refers to the availability of futures and options (F&O) contracts linked to a particular stock or an index as the underlying measure. Both the National Stock Exchange of India Ltd (NSE) and BSE have a vibrant F&O segment.
Retail investor activity in the F&O segment of the equity market had risen earlier in the year against the backdrop of buoyant equity markets, leading to increased concerns. The average daily turnover for the retail category of investors in F&O amounted to ₹ 1.04 trillion in the quarter ended 31 March on the NSE, according to data from brokerage firm Motilal Oswal Financial Services Ltd. This was the highest retail turnover in this segment since the first quarter of 2012, from when data is available.
This had prompted the regulator to write to exchanges, seeking their view on a possible increase in the contract size and its impact on participation in the F&O market, The Economic Times reported on 18 May.
The revision in minimum contract size follows these deliberations.
“This move will attract only serious investors to the equity derivatives segment, even within the retail category. This is because in equity derivatives trading, even if there is a capital evaporation due to any error, the investor needs to pay," said Bhavin Desai, derivatives strategist, Motilal Oswal.
Desai, however, added that overall volumes in the segment may not be impacted in the long run. “...our markets are mature enough now. Due to this move, the derivatives volumes may not be impacted much. Even if there is a slight beating in the beginning, the overall volumes will re-balance and keep growing," he said.
On Monday, the client-category participants’ (which includes retail investors) share of open interest in the equity F&O segment was 41.5% of the total long contracts turnover, while it was 46.11% of the total short contracts turnover on NSE.
This is the first time since equity derivatives were introduced in 2001 that Sebi has increased the minimum contract size. However, the regulator has over time become cautious about retail participation in the derivatives market. In November 2012, it had barred exchanges from offering mini derivative contracts that were essentially launched to get more retail investors into the F&O space. The contract size for the mini derivative contracts had been set at ₹ 1 lakh.
“This is in line with Sebi’s view that retail participation should be curbed in the derivatives segment," said Hemant Nahata, senior derivative analyst, IIFL Ltd.
Nahata, too, said that the impact on turnover may be limited. “In equity derivatives, it is likely that the move to increase contract size would not have a very significant impact as the contract size of many stocks is already well above ₹ 2 lakh due to high share price and the number of stocks in one lot. There could be some impact in the options side as the costs would go up," said Nahata.
As per Sebi’s circular, the lot size for derivatives contracts in the equity derivatives segment will be fixed in such a manner that the contract value of the derivative on the day of review is within ₹ 5 lakh and ₹ 10 lakh. The lot size would be reviewed every six months, said the regulator.
Lot size refers to the number of underlying securities in one contract. The lot size is determined keeping in mind the minimum contract size requirement at the time of introduction of derivative contracts on a particular underlying. The new circular will be effective from the trading day after the expiry of the October 2015 contracts.
Ashish Rukhaiyar and PTI contributed to this story.
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