From Speculation to Stability: SEBI’s Comprehensive Regulatory Measures in Derivatives Markets

BACKGROUND

Derivatives are a cornerstone of modern financial markets, providing a vast array of tools for speculation, risk management, and portfolio diversification. However, despite their usefulness, derivative instruments come with a set of inherent risks, especially when traded by retail investors who may not have the necessary expertise or tools.

Given the changing market dynamics in the equity derivatives segment in recent years with increased retail participation, offering of short-tenure index options contracts, and heightened speculative trading volumes in index derivatives on the expiry date, the regulator seeks to enhance investor protection and promote market stability in derivative markets, while ensuring sustained capital formation.

Dynamics of Derivatives with the Retail Segment

The retail segment in India has seen substantial growth in derivatives trading, particularly in the equity F&O (Futures and Options) market. However, recent studies conducted by the Securities and Exchange Board of India (SEBI) have raised concerns about the financial health of retail traders in the equity F&O segment. Significant trading activity happens during the day of expiry and significant speculative activity happens during the contract expiry period.

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