No More Derivative Restrictions On The Anvil, Says Sebi Wtm

No More Derivative Restrictions on the Anvil, Says SEBI WTM

SEBI Not Planning More Derivative Restrictions – Focus on Risk Management

The Indian capital markets regulator, the Securities and Exchange Board of India (SEBI), has reiterated that it is not planning any additional measures to curb or restrict activities in the derivatives market. SEBI’s Whole-time Member (WTM) Ananth Narayan emphasized that while ongoing discussions are focusing on refining risk management and improving the ease of doing business, no immediate steps are being considered to impose further restrictions on derivatives trading. In light of past regulatory measures, the focus remains on balancing market efficiency and investor protection without compromising market integrity.

Background of Derivative Market Regulations

The derivatives market has long been a crucial part of the financial ecosystem in India, offering investors and institutions tools to hedge risks, speculate, and enhance market liquidity. However, the recent volatility and concerns raised by data showing significant retail losses in speculative trades have prompted SEBI to review and implement measures aimed at curbing risky trading behaviors. In November, SEBI introduced restrictions in the futures and options (F&O) market, tightening the margin requirements and trading limits to ensure that only informed investors engage in high-risk derivative activities. This move was aimed at minimizing the high speculative tendencies and protecting retail investors from potential losses.

SEBI’s Current Stance on Derivatives Regulation

Speaking at an event organized by SEBI-promoted NISM, Ananth Narayan clarified that SEBI is not considering further regulatory interventions at this point. He explained that the recent steps taken have provided a structured framework for managing risk in the derivatives market. “At this point in time, there is no thought of SEBI taking any further steps in this particular regard,” Narayan said, emphasizing the importance of letting the current regulatory changes take effect.

Expert Group on Enhancing Derivatives Regulation

To address the complexities of the derivatives market and improve its functionality, SEBI has formed an expert group led by former RBI executive director G Padmanabhan. This group is tasked with evaluating the effectiveness of existing measures and proposing additional strategies that focus on enhancing risk management and market efficiency. Narayan highlighted that the discussions revolve around creating a more precise metric for measuring market risks, especially in derivatives, to provide a clearer picture of market activities.

Enhancing Risk Management and Market Connectivity

One of the significant areas of focus is the measurement of risk in the derivatives market. Currently, the method used to measure open interest, based on notional values of futures and options, has been criticized for failing to accurately reflect market conditions. SEBI recognizes the need for a more robust framework that captures true market risk, which will pave the way for more informed decision-making.

Furthermore, enhancing the connectivity between cash and derivatives markets is another priority. Narayan emphasized that a balanced and integrated approach between the two markets is essential for maintaining stability. He stated, “What is very clear to us is the current way of measuring open interest as notional of futures and notional of options is simply not right.”

Addressing Market Manipulation and Concentration

Concerns have also been raised about the high concentration of specific stocks in F&O indices, which could potentially lead to market manipulation. SEBI has been carefully evaluating whether restrictions on the weightage of top stocks should be introduced. This step is critical for ensuring that market indices reflect a more diversified and realistic view of the underlying securities. Narayan assured that any such measures will only be introduced after thorough discussions and deliberation with all stakeholders.

SEBI is also considering revising index trading limits imposed during the COVID-19 pandemic, aimed at controlling volatility while ensuring market accessibility for investors. By doing so, SEBI aims to maintain investor trust and foster a stable trading environment in derivatives markets.

Conclusion

SEBI’s proactive yet cautious approach to regulating the derivatives market is designed to strike a balance between market innovation and investor protection. By refining existing measures and engaging in constructive dialogue with market participants, SEBI aims to create a resilient derivatives market that supports healthy price discovery, effective risk management, and sustained market growth. With the ongoing efforts to enhance the system, SEBI is confident that a well-regulated derivatives market will continue to contribute positively to the Indian financial landscape.

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