“All I can say is that a discussion paper will be issued shortly,” said a person aware of the development.
The SMAC meeting was held to deliberate the recommendations of the Padmanabhan Working Group Committee on F&O.
The panel headed by former Reserve Bank of India executive director G. Padmanabhan had in a report earlier this month suggested increasing the cost of trading to dissuade small retail clients from accessing the equity F&O segment on exchanges such as the National Stock Exchange (NSE) and BSE fearing mounting losses for them.
The panel has proposed increasing the contract value of derivatives instruments, increasing the price interval between options contracts and having one index option expiry a week instead of the current five expiries per week.
Given that this will be a major policy decision, the SMAC decision on the Padmanabhan panel could be discussed by the Sebi board, led by chairperson Madhabi Puri Buch and its four whole-time members, according to a former Sebi official.
“Though Sebi will not have to issue regulations to institute any of the panel recommendations, these will be discussed by the Sebi board, given its far-reaching implications,” said M.S. Sahoo, former whole-time member of Sebi.
Monday’s meeting was a result of rising regulatory concern over retail exuberance, especially on trading index options, including Nifty and Bank Nifty, after the pandemic.
Flagging concerns on the retail fixation of F&O trade, RBI governor Shaktikanta Das said at a media event last month that equity derivatives trade turnover has exceeded the country’ nominal GDP (provisional ₹295.36 trillion).
Data on NSE, the world’s largest equity derivatives marketplace, shows notional turnover of equity derivatives jumped 23-fold, to ₹79,928 trillion in FY24 from ₹3,445 trillion in FY20. Around 98% of this notional turnover is accounted for by index options alone. Premium turnover, or the actual traded turnover of index options, has risen 12.77 times to ₹138 trillion over the same period.
Sebi asks brokers to upload disclaimers
Concerns about mounting retail losses cropped up two years ago, when Sebi mandated that brokers upload disclaimers on their broking apps and websites warning that nine out of 10 derivatives traders lose money, net trading loss is close to ₹50,000; they also spent 28% more of net trading losses as transaction costs, etc.
This has forced Sebi to think anew on measures to curb retail exuberance in F&O. The counterparty to retail tends to be the technology savvier and deep-pocketed proprietary (pro) trader, a broker trading on his own account.
While retail client market share in premium turnover of index options stood at 35.5% in the fiscal year through May (FY25), up 140 basis points from the corresponding period of the previous fiscal year, proprietary traders’ share fell 315 bps to 46.1% over the same period, show NSE data.
If the regulator decides to accept the panel recommendations including increase in lot size, increasing price intervals between option strikes and having a single product expiry a week against the current practice of having five products could impact turnover by as much as a fifth, according to Sahoo.
However, not all believe that the proposals will prove effective in denting retail trade. Getting rid of weekly option expiries and having only monthly ones will be more expedient than raising contract lot sizes.
“Increasing the lot sizes will force many retail investors to buy deep out-of-the-money options, which, in most cases, expire worthless and add up to their losses,” said research analyst Sandip Sabharwal. “It is better to eliminate weekly expiries and only have monthly expiries as weekly options have lower value and many retail investors tend to buy them cheap only to lose money. Weekly expiries are also more prone to manipulation.”
To dissuade retail individuals from the F&O segment, the panel had recommended increasing the contract values . For instance, raising the price of a Nifty futures contract from ₹5-6 lakh currently to ₹25-30 lakh, increasing the price interval between option strike prices and having only a single expiry per week for each exchange.
The NSE has launched weekly expiry options on Nifty Midcap Select (every Monday), Nifty Financial Services or Finnifty (Tuesday), Bank Nifty (Wednesday) and Nifty (Thursday), while BSE has launched Sensex option contracts on Friday and Bankex on Monday.
“Sebi’s latest measures come in the wake of non-retail traders gaining at the expense of retail trade,” said Nilesh Shah, MD, Kotak Mahindra AMC. “Pro traders use algorithms based on data analytics to trade while most retail don’t have access to the same tech and analytics.”