Foreign Portfolio Investors (FPIs) have raised concerns over the Securities and Exchange Board of India’s (SEBI) recent efforts to tighten regulations for derivatives trading. These concerns were shared during discussions at the JP Morgan India Investor Summit, where SEBI officials addressed the growing worries regarding the proposed changes in the Futures & Options (F&O) market. The primary concern stems from the rising volatility in index options as their expiry nears.
SEBI’s Proposed Changes to F&O Trading
SEBI is expected to discuss the proposed changes to F&O trading rules in its upcoming board meeting. The changes are aimed at curbing the increasing participation of retail investors in derivatives trading. SEBI has expressed its worry on several occasions, noting that a large portion of retail traders are engaging in high-risk F&O trading, leading to substantial losses.
In response, SEBI previously released a consultation paper to gather opinions from market participants about the proposed reforms. SEBI’s concern stems from the fact that retail participation in the derivatives segment has grown significantly, often leading to losses due to a lack of proper understanding of the risks involved.
Foreign Investors Request Gradual Changes
SEBI’s discussions with FPIs suggest that the regulator wants to keep foreign investors informed about potential changes. However, FPIs have urged SEBI to implement any rule changes gradually, rather than making drastic adjustments all at once. They argue that sudden and significant changes could adversely affect the market, especially in terms of liquidity.
An official from a leading foreign trading firm shared their viewpoint, saying that while tightening the rules to protect retail investors is understandable, any major shift in regulations could disrupt liquidity, which would impact all market participants. The concern is that rapid rule changes could create uncertainty in the market, as seen in previous instances when SEBI had to reverse some of its decisions after market disruptions.
Study on Retail Investors Sparks Debate
A study conducted by SEBI in September highlighted that 93% of retail traders engaged in F&O trading faced losses over the past three years. The total loss reported by retail traders amounted to Rs 1.8 lakh crore. SEBI believes that tighter regulations are necessary to protect retail investors from such massive losses.
However, foreign investors have questioned the findings of SEBI’s study. Some argue that the study implies foreign traders are profiting at the expense of retail investors. They counter this by pointing out that the success rate of foreign traders in the derivatives market is around 50%, meaning they too face significant losses in half of their trades.
Liquidity Concerns
FPIs are particularly worried that the tightening of F&O trading rules could negatively impact market liquidity. In previous instances, when SEBI made swift regulatory changes, liquidity in the market was affected, leading to uncertainty among traders. FPIs emphasize that while they understand SEBI’s intentions, the market regulator should strike a balance between protecting retail investors and maintaining market stability.
The potential impact of the new rules on market liquidity has been a key topic of discussion among foreign investors. Liquidity is crucial for the smooth functioning of the F&O segment, and any disruption could have broader implications for market participants.
Final Thoughts on the F&O Market
As SEBI moves forward with its plans to tighten F&O trading regulations, it will need to carefully consider the concerns raised by FPIs. Striking a balance between protecting retail investors from excessive risk and ensuring market liquidity remains stable will be essential. Any changes that affect liquidity could have far-reaching consequences, impacting not only foreign investors but the overall stability of the Indian derivatives market.
