Foreign portfolio investors (FPIs) are concerned about SEBI, the Securities and Exchange Board of India, wanting to put new limits on trading in the derivatives market. This concern comes just before an important SEBI meeting on Monday, where stricter rules will be discussed.
SEBI’s Outreach to Foreign Investors
At the recent JP Morgan India Investor Summit, SEBI officials told foreign investors that their main worry is the high trading volumes in index options, especially around expiration dates. SEBI is trying to communicate better with foreign funds and has started a program to keep them informed about any changes.
Confusing Changes in Regulations
A senior official from a foreign trading firm mentioned that SEBI often makes big changes to rules very quickly, which can confuse people in the market. After making these changes, SEBI usually relaxes the rules, leading to uncertainty. While foreign investors agree with tightening the rules to protect regular investors, they think it shouldn’t hurt overall market activity.
SEBI’s Response to Concerns
SEBI reassured foreign investors that they do not plan to limit how much people can trade in derivatives. Instead, they want to reduce risky trading among retail traders, many of whom are losing money. SEBI’s focus is on the increasing trading volumes in index options, and they believe the new rules will not significantly affect market activity.
Disagreement Over Losses
Foreign investors also questioned SEBI’s claim that 93% of retail traders have lost money in derivatives over the last three years, with total losses reaching Rs 1.8 lakh crore. They argue that foreign traders win about half the time, meaning they lose money on half of their trades. Even when they do make money, the profits are often small after taxes, which leads them to make more trades.
Suggestions from Foreign Investors
FPIs have suggested that SEBI consider a system like Hong Kong’s, where only certain qualified traders can participate in derivatives trading. In Hong Kong, brokers must check that their clients understand the derivatives market before letting them trade. They believe a similar system could work in India, allowing only knowledgeable traders to participate. However, they warn that raising lot sizes or margins could scare away good traders, who are necessary for market activity.
Past Regulation Attempts
SEBI had looked into creating a system for ‘Accredited Investors’ in 2018, which would let only qualified individuals trade in high-risk markets. However, this idea was dropped because retail investors were worried about losing access.
Conclusion
As SEBI thinks about changing rules in the derivatives market, the worries of foreign investors show that it is important to protect retail traders without harming market activity. Ongoing discussions and ideas from foreign investors may help shape the future of these regulations.
Update
SEBI met with its Board on September 30 but did not announce any changes to the index-derivative rules. They had earlier suggested new rules to improve market stability, such as increasing contract sizes, collecting options premiums upfront, and allowing two expiries a week.
