A statement by Sebi chief Madhabi Puri Buch that the regulator is ready to take some derivative products off the shelf has sparked fear in the markets. On target is the weekly expiry of futures and options contracts while some also believe that SEBI could even clamp down on India's index derivative contracts that are the world's highest traded now. This would severely affect the share price of the listed stock exchanges and brokers will face loss of business.
Answering a question in a press conference on whether Sebi saw any move that will result in contraction of trading turnover, a regressive step, Buch said, "Not at all." It simply means that Sebi saw no harm in compromising trading volumes. Sebi's secondary market committee is deliberating on the steps it needs to take to curb retail participation in futures and options trading. Any curbs to trading volumes could affect tax collections to the government from the stock markets, but the Sebi chief was looking to compensate it with higher good deeds.
Buch said Sebi had noticed concentration of trading in weekly options and on expiry day which was driven purely by speculation, not hedging. This is the key reason that brokers believe that weekly expiry in the futures and options segment will be withdrawn by Sebi and only monthly expiry will remain like the earlier days. The share price of BSE is likely to be affected in the coming days since the weekly expiry of derivatives was bringing volumes on the platform.
Before Buch became the Sebi chief, the futures and options contracts expired every Thursday. But BSE requested for a different expiry day during the week for its derivative products and Sebi granted its approval. Now, almost every day of the week there is a derivative expiry and hence the volumes largely keep shifting from one product to another based on the expiry day. In the press conference last week, Buch said SEBI will take steps based on the recommendations of its Secondary Markets Advisory Committee. Last week, Sebi charged the criteria for the inclusion and exclusion of stocks into the derivatives segment.
"The question is what needs to be done for investor protection, particularly since we have heard of people borrowing money for this speculative activity," Buch said and also cited anecdotal evidence of people losing their homes from this.
Brokers fear that the risk of regulatory changes to their business was far bigger than anticipated. In April 2024, after the Reserve Bank of India (RBI) restricted the use of unhedged currency derivatives, Zerodha founder Nithin Kamath had tweeted about the regulatory risk. "I have said this before, regulatory risk is by far the biggest risk for stock brokers," Kamat had written on his twitter handle.
Often when regulators have imposed curbs on trading, the retail investors have shifted to unregulated markets like Dabba Trading, which is simply recording of the trades on chits of papers. It is likely that whatever products that are taken off the shelf by SEBI and end up being embraced by retail traders in the illegal Dabba Trading market, brokers said.
