The power regulator of markets SEBI on Wednesday announced to rebuild its rules for derivatives trading through a public discussion. In addition to the suitability of these ‘more complex and risky’ products for individual investors.
Sebi noted that the trading turnover in these products has seen a sharp flow of ten-fold over the past decade, due to which the ratio of trades in equity derivatives to that of equity cash market has risen to over 15-times.
While several individual investors are active in the derivatives segment, it has been examined that these investors may or may not have sufficient financial capability to withstand risks posed by complex derivative instruments, SEBI said.
“In the absence of a product suitability framework, this may not be in the interest of securities market,” the regulator said while inviting public comments by 10 August on whether there was a need to introduce such a framework.
Besides, Sebi will also look for an address with the new standard or any disorganized present in the market and any regulatory arbitrage that needs to be plugged.
Derivative in financial markets typically meant to a forward, future, option or any other hybrid contract of pre-determined fixed duration.
Linked with the motive of contract fulfillment to the value of a defined real or financial asset or to an index of securities.
Widely, there are two types of derivative contracts—futures and options.
A futures contract means a legally binding agreement to buy or sell the underlying security on a future date.
While options contract gives the buyer or holder of the contract the right (but not the commitment) to buy or sell the underlying asset at a fixed price within or at end of a defined period.
In fiscal 2016-17, the total turnover in the equity cash market stood at about Rs60.5 trillion, whereas the same for equity derivatives was a rolling over Rs944 trillion.
While the cash market has grown at an annual compounded growth rate of 11% since 2004-05, the same for equity derivatives is over 35%.
In the discussion of the comments on the behalf of all stakeholders, Sebi said, “The ratio of turnover in derivatives to turnover in the cash market is around 15 times. To what extent the drivers of this ratio in India are comparable with drivers in other markets.”
SEBI is also looking to know the global best practices and experience in international markets to align cash and derivative markets.
The discussion paper also looks to understand what measures would be required to generate balanced participation in equity derivatives market and what could be the guiding rules for setting minimum contract size and open position limits for equity derivatives, considering the participant’s profile and other factors.
Besides, the process would decide whether SEBI needs to analyze existing criteria for introduction of derivatives on stocks along with the present margin frameworks as well as trading and risk management frameworks, require any changes.
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