Informist, Friday, Sep 6, 2024

By Rajesh Gajra

MUMBAI – The Securities and Exchange Board of India is unlikely to soften strict measures proposed in the consultation papers for index derivatives framework despite objections by several brokers and traders, according to stock-broking sources. The regulator is ready with the final views on the proposal and may just release a circular, notifying changes in the norms without getting it reviewed by the board, which will meet later this month, a source familiar with the matter told Informist.

On Jul 30, the regulator had floated a consultation paper, proposing steps to strengthen the framework so as to increase investor protection and market stability, and had also sought feedback on them.

Chairperson Madhabi Puri Buch said last week at the Global Fintech Fest that SEBI had received around 6,000 responses to the F&O consultation paper. She indicated that SEBI's automated feedback collation system was used to speedily process the responses. The market regulator only had to "look to the bulk of the feedback" in different areas "and apply our mind to saying whether we agree, partly agree, or disagree," and change the proposals if required.

Senior officials from National Stock Exchange and BSE told Informist that they do not oppose the proposals, which include raising the minimum size of index futures and options contracts to 2-3 mln rupees from 500,000 rupees to 1 mln rupees currently in two phases, intraday monitoring of position limits, and restricting weekly index options contracts to just one benchmark index per exchange. But they would like to be given sufficient time to implement the changes.

NSE Managing Director and Chief Executive Officer Ashishkumar Chauhan said today at an event in Mumbai that small investors should not dabble in equity futures and options. This is not the first time Chauhan has suggested caution.

Equity futures and options stock brokers, however, have indicated that the proposals are harsh on derivatives traders, do not distinguish between prudent and reckless traders, and are not completely relevant to the objective of preventing market instability.

The head of a Mumbai-based stock broker, who also holds a senior post at the Association of National Exchanges Members of India, told Informist that brokers have put forth their reservations on the proposals but SEBI has been insistent that the tightening measures will take place. He was referring to the outcome of a recent meeting of SEBI's secondary market advisory committee. He said that except for the proposal on sharp rise in minimum contract size where the first phase will see a moderate increase, all the rest will likely go through without any favourable consideration of brokers' suggestions.

The market regulator will not give weightage to stock brokers' objections as it has made it clear in the recent past that it is not least comfortable with the continuous surge in volumes in the weekly contracts in the last four years. SEBI is particularly keen that investors' fancy for weekly expiry index options contracts with every trading day seeing at least one index's contracts expire cool off.

Large open interest and hyperactive trading activity taking place close to expiry, and the risks they potentially pose to market stability if they continue unabated, are what SEBI was most concerned about. "If an extreme black swan event were to occur minutes before expiry, with heightened OI (open interest) and activity at stake, the potential stress to the ecosystem with those that are short options rushing to hedge in cash, futures, and/or options markets can be immense," SEBI said in the consultation paper.

The SEBI board is meeting this month end. The last board meeting of SEBI took place on Jun 28, and as per past trend, the meeting is held once every three months. But if SEBI notifies a circular, there won’t be any board review of the matter. End

Edited by Akul Nishant Akhoury

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