SEBI to review recommendations for formation of panel on futures and options to mitigate increasing leverage and volatility

This panel was established to suggest ways to mitigate increasing leverage and volatility for retail investors, according to sources familiar with the matter.

The SMAC includes SEBI officials, representatives from stock exchanges, and leaders from major brokerages and broker associations, according to the report.

The rising turnover in the derivative segment has raised concerns not only for SEBI but also for the Reserve Bank of India and the Finance Ministry.

Recommendations on Volatility

One of the key recommendations under consideration is to increase the lot size of derivatives contracts from the current value of around Rs 5 lakh per contract to between Rs 10-20 lakh. This adjustment aligns with the significant growth in market volumes and turnover, which have nearly tripled over the last six years.

The expert panel has also suggested that exchanges consolidate the expiry of option products to a single day each week, rather than having daily expiries. By designating one specific day for the expiry of all products on an exchange, it aims to reduce volatility throughout the week and minimize potential price manipulation of index components.

The panel did not propose reducing the number of weekly expiry products but recommended consolidating their expiries to a single day per exchange.

Another recommendation is to reevaluate the calendar spread benefits offered beyond three months. This review could encourage a shift from short-term trades to longer-term ones, addressing a recent study that found the average trade cycle has shortened to under 40 minutes. Lower upfront margins are typically required for longer duration spreads.

Suggestion on Leverage

The committee has advised charging upfront premiums directly from investors. Currently, brokers provide upfront premiums to exchanges, funding them through leverage based on investor collaterals. The regulator may consider direct routing of these premiums to enhance transparency and reduce intermediary involvement.

Bigger margins

The panel also explored the idea of increasing intraday margins for futures and options (F&O) trades. However, this proposal is expected to face resistance due to industry complaints about already high margins in derivative trading.

Recent SEBI data indicates that options premium turnover has surged from Rs 4.5 lakh crore in 2018 to Rs 140 lakh crore in 2024.

Overall derivative turnover has grown from Rs 210 lakh crore to Rs 500 lakh crore in the same period, with individual participation in options trading rising from 2% to 41% over the past six years.