People borrowing money, household savings going into speculative F&O bets: SEBI Chairperson

Mumbai: Sebi chairperson Madhabi Puri Buch on Thursday said the capital markets regulator has anecdotal evidence of people borrowing money to place speculative bets in the derivatives segment and rued that household savings are going into such risky bets.

Making it clear that it is “not a good thing”, Buch said people are borrowing money and even mortgaging their parents’ homes for raising funds to punt in the derivatives segment.

Reminding about Sebi research pointing out retail investors losing money in nine of ten trades, Buch said big money is being lost in such aspects, and also underlined broader macroeconomic concerns.

“There is a large amount of money that is going from household savings into what is essentially not productive economic activity. This is speculative activity, this is not going into any capital formation in the economy,” she said.

Buch elaborated that most of the trades are speculative because they are done on expiry date or in the last hour of trade, and have no hedging, which make it clear about the nature of the operation being speculative.

She said that apart from investor protection, another dimension of the concerns on the F&O market involves systemic risks in the capital markets ecosystem but was quick to add that we are reasonable well protected on this front.

To take care of all these concerns, the capital markets regulator has formed an expert group to study the futures and options market activity, Buch said, adding that it will go into all the aspects of the market and submit its recommendations to the secondary market advisory committee.

After this, there will be a public consultation on the same, she assured.

Buch said there is a need to look into the derivatives activity because of the very high numbers, and pointed out the huge jumps in the last six years.

The overall turnover was Rs 210 lakh crore in FY18, jumped to Rs 500 lakh crore in FY24, she said, adding that individual investors in index options jumped to 41 per cent in FY24 from 2 per cent in FY18.

She also quipped that the analogy of the warnings while cigarette buying is not wrong when compared with the F&O trade.

To a question about the likely financial implications of any action against F&O segment like the revenues for exchanges going down, she reminded that all the stakeholders need to be aware of regulatory risk in the business.

The regulator’s board also approved stricter norms for inclusion of derivative trading for the entry and exit of individual stocks in the derivatives segment.

“With a view to ensuring the continued development of a vibrant securities market ecosystem with appropriate regulation and investor protection, the board has approved a revision in eligibility criteria for the entry and exit of stocks in the derivative segment of the exchanges,” the regulator said.

The move would weed out stocks with consistently low turnover from the Futures & Option (F&O) segment of the bourses and also add some, and top officials said that there will be a net addition to the current number of 182, going by the current data.

The review was done considering remarkable growth in market parameters, reflecting the size and liquidity of the cash market like market capitalisation and turnover. The last review of the eligibility criteria for the introduction of stocks in the derivatives segment was conducted in 2018.

Sebi said that eligibility criteria for entry or exit of stock should be based on the performance of stocks in the underlying cash market.

It further said that stock should continue to be chosen from among the top 500 stocks in terms of average daily market capitalisation and average daily traded value on a rolling basis.

Further, the stock’s market-wide position limit should not be less than Rs 1,500 crore. The stock’s Median Quarter-Sigma Order Size over the last six months should be Rs 75 lakh against Rs 25 lakh at present.

The stock’s minimum rolling average daily delivery value in the cash market in the previous six months should be Rs 35 crore. Currently, this is Rs 10 crore.

To evaluate the exit of a stock from the derivative segment, Sebi said that at least 15 per cent of active traders or 200 members, whichever is low, should have traded in the stock on the stock being reviewed, average daily turnover should be at least Rs 75 crore and average daily notional open interest (futures + options notional) should be at least Rs 500 crore of that particular stock.

The criteria for exit should apply to only those stocks, which have completed at least 6 months from the month of entry into the derivative segment. Further, for existing stocks in the derivatives segment, the exit criteria on the basis of performance would be applicable 3 months after the date of issuance of the circular.