Markets regulator Sebi today proposed to overhaul its rules for derivatives trading through a public consultation, including on suitability of these 'more complex and risky' products for individual investors.
The regulator noted that the trading turnover in these products has seen a sharp surge of over ten-fold over the past decade, during which the ratio of trades in equity derivatives to that of equity cash market has risen to over 15-times.
While large number of individual investors are active in derivatives segment, it has been observed that these investors may or may not have adequate financial capability to withstand risks posed by complex derivative instruments, Sebi said.
"In the absence of a product suitability framework, this may not be in the interest of securities market," the regulator said while inviting public comments by August 10 on whether there was a need to introduce such a framework.
Besides, Sebi will also seek to address, with the new norms, any inefficiencies present in the market and any regulatory arbitrage that needs to be plugged.
Derivative in financial markets typically refers to a forward, future, option or any other hybrid contract of pre- determined fixed duration, linked for the purpose of contract fulfilment to the value of a specified real or financial asset or to an index of securities.
Broadly, there are two types of derivative contracts -- futures and options. A futures contract means a legally binding agreement to buy or sell the underlying security on a future date, while options contract gives the buyer or holder of the contract the right (but not the obligation) to buy or sell the underlying asset at a predetermined price within or at end of a specified period.
In fiscal 2016-17, the total turnover in equity cash market stood at about Rs 60.5 lakh crore, whereas the same for equity derivatives was a staggering Rs 944 lakh crore.
While the cash market has grown at an annual compounded growth rate of 11 per cent since 2004-05, the same for equity derivatives is over 35 per cent.
In its discussion paper inviting comments from all stakeholders, Sebi said, "The ratio of turnover in derivatives to turnover in cash market is around 15 times. To what extent the drivers of this ratio in India are comparable with drivers in other markets."
The comments have also been sought on all issues related to trading in derivatives, participants' profile, product mix and stock eligibility to further strengthen the framework in line with the emerging trends and global best practices.
Sebi is also seeking to know the global best practices and experience in international markets to align cash and derivative markets.
The discussion paper also seeks to understand what measures would be required to create balanced participation in equity derivatives market and what could be the guiding principles for setting minimum contract size and open position limits for equity derivatives, considering the participants' profile and other factors.
Besides, the process would decide whether Sebi needs to review existing criteria for introduction of derivatives on stocks or on indices and whether the present margin frameworks, as also trading and risk management frameworks, require any changes.
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