Sebi's F&O curbs for stemming 'frenzied trading'

Markets regulator Securities and Exchange Board of India (Sebi’s) measures to curb speculative activity in the Rs 450-trillion-a-day futures and options (F&O) market is not a case of “throwing the baby out with the bathwater,” whole-time member (WTM) Ananth Narayan said on Friday.

“As a regulator, we are conscious that we must not throw the baby out with the bathwater.

"When it comes to frenzied trading in options nearing expiry, however, it is difficult to see any baby in this bathwater,” he said while delivering his address at the 21st FICCI Annual Capital Markets Conference.

Earlier this week, Sebi floated a consultation paper to safeguard retail investors from the F&O market as their annual losses are upwards of Rs 50,000 crore.

Narayan said the measures proposed are more short-term and immediate while the regulator is also planning more action over the medium-term measures.

“We will deliberate on some of these issues for the medium-term.

"For instance, the way we measure positions in the case of F&O, currently it is based on notional (turnover) added across futures and options — which doesn’t make sense.

"We are trying to see if we can move to a ‘future equivalent’ or delta equivalent measure — that is one of the possibilities,” he said, while responding to queries from participants at the event.

“Second is, should there be a connection between average daily delivery volumes in stocks, and the maximum open future equivalent positions in its derivative.

"We don’t have any set views on issues but we intend to have open discussions," he added.

Explaining the rationale behind recent proposals, Narayan said that it will not restrict avenues for market making, hedging or trading but only address the issue of hyperactive trading on expiry day options.

“Trading in index options — specifically close to expiry — starts to resemble a slot machine in a casino, with individuals putting coins into the machine, hoping to hit the jackpot,” he said.

He emphasised that it would be unfair to compare all of the equity F&O with a casino and lose sight of its utility on capital formation, and that the concerns are more pronounced in options trading closer to expiry.

“Not taking timely steps along these lines can threaten the market goose that is laying golden eggs,” he said.

Based on an expert working group recommendations, the markets regulator has proposed fewer options strike prices, upfront collection of options premium, at least trebling minimum contract sizes, and reducing weekly expiries.

The Sebi WTM also pointed out the mismatch between paper supply and strong inflows into the market.

“While we celebrate the steady transformation of the Indian saver into an investor and the consequent increase in market capitalisation, we must consider the current mismatch between the demand for securities and the supply of securities,” said Narayan.

He shared that there has been Rs 3.1 trillion of net demand for paper brought in by mutual funds, domestic institutional investors and individuals into the secondary market every year over the past three years.

This, however, far exceeds the Rs 2 trillion annual primary market issuance across IPO, FPO, preferential allotment, QIP, rights issue, and OFS.

“Prolonged mismatch of this nature can leave us with more asset price inflation, rather than capital formation.

"Anecdotally, the price of over 30 per cent of midcap and small stocks have more than tripled over the last three years,” he added.