F&O Trading: Sebi Panel Suggests Rs 20-30 Lakh Minimum Lot Size, One Weekly Options Contract Per Exchange

Sebi’s Working Committee on Futures and Options has reportedly recommended raising the minimum lot size of derivative contracts from the current Rs 5 lakh to Rs 20 lakh-Rs 30 lakh. Additionally, they suggest limiting weekly options to a single expiry per stock exchange each week.

According to a report by Moneycontrol, the panel recommended one key measure to curb the unbridled rise in derivatives volume is to limit the number of strike prices for options contracts.

Sebi, the Securities and Exchange Board of India, appointed an expert working committee last month to address the issue of excessive speculation driven by high retail participation in recent years.

The Sebi-appointed expert group on exchange-traded derivatives has started discussions on seven proposals to address regulatory issues and protect small investors from risks in index and stock option trading.

Sebi is keeping a close eye on F&O trading due to a recent surge in retail investor participation and the potential risks involved.

“The expert group would deliberate in detail the pros and cons of each of the seven proposals to protect small investors engaged in futures and options (F&O) trading. We know that nine out of ten small investors lose money in F&O. The recommendations of this group will be considered by the Secondary Market Advisory Committee for a final decision,” a source close to the development told PTI.

Options are financial contracts that give a holder a right, but not the obligation, to buy or sell an underlying asset at a specified price within a contract period.

The panel members would recommend short-term strategies to bolster investor protection and improve risk metrics in this market segment.

The proposals included rationalisation or limiting weekly options, rationalisation of strike prices of the underlying assets and removal of calendar spread benefits on the expiry day, according to the sources.

The other four proposals were an upfront collection of option premiums from buyers of options, intra-day monitoring of position limits, an increase in lot sizes and a hike in margin requirements near contract expiry.

Both the Sebi and the Reserve Bank have expressed concern over the risks associated with retail investors, amid market volatility.

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

The rapid rise in F&O trade volumes in recent years could pose several challenges as retail investors who are not following proper risk management could be impacted by sudden market movements, a Reserve Bank report stated.

The expert group is also scrutinising the weekly options in detail as these are most attractive to retail investors who can participate with low capital.

Rationalisation of strike prices is another area of interest to prevent small investors from incurring losses.

The expert group is also looking into options for increasing lot sizes.