The Securities and Exchange Board of India (SEBI) has recently proposed certain curbs on the derivatives market (F&O) in an attempt to reduce speculative trading and protect retail investors. However, these proposed measures have raised concerns about a potential increase in dabba trading.
Dabba trading is an illegal and unregulated form of trading where trades are not executed on official stock exchanges. It operates outside the purview of regulatory bodies, posing significant risks to investors.
SEBI Proposed Curbs:
Increase in minimum contract size: SEBI proposes to increase the minimum contract size for index derivatives from the current range of ₹5-10 lakh to ₹15-20 lakh initially, and further to ₹20-30 lakh after six months. This is aimed at deterring small traders with limited capital from participating in high-risk F&O trading.
Upfront collection of option premium: Brokers will be required to collect option premiums upfront from clients instead of allowing them to pay on the expiry day. This will reduce the leverage available to traders and discourage excessive speculation.
Intraday monitoring of position limits: Market Infrastructure Institutions (MIIs) will be required to monitor position limits for index derivative contracts intraday. This will help in identifying and curbing excessive speculative positions.
Rationalization of weekly index products: SEBI proposes to allow only one weekly options contract on a single benchmark index of an exchange. This will limit the number of weekly expiries and reduce the potential for speculative trading around expiry days.
Removal of calendar spread benefit on expiry day: The benefit of calendar spreads, which allows traders to roll over their positions to the next expiry, will be removed on the expiry day for positions involving contracts expiring on the same day. This is aimed at reducing speculative trading activity around expiry.
Rationalization of options strikes: SEBI proposes to rationalize options strikes with a uniform interval up to a certain level and an increased interval as the strikes move further away from the prevailing index price. This will reduce the number of strikes available and discourage excessive speculation in far out-of-the-money options.
Higher margins near expiry: Margins on the expiry day and the previous day will be increased to address the issue of high implicit leverage in options contracts near expiry. This will make it more expensive for traders to take large positions near expiry and reduce speculative activity.
Concerns about Dabba Trading:
While the proposed measures are aimed at protecting retail investors and ensuring market stability, they have also raised concerns among some market participants. Some argue that the increased cost of trading could push traders towards unregulated markets like dabba trading. Key Points:
Shifting of volumes: Market participants fear that the increased cost and complexity of trading in the regulated F&O segment could push traders towards the unregulated dabba market.
Lack of investor protection: Dabba trading offers no protection to investors, making them vulnerable to fraud and losses.
Increased systemic risk: Unregulated dabba trading could pose a risk to the overall financial system.
Experts’ Opinions:
Many market experts have expressed concerns about the potential unintended consequences of SEBI’s proposed measures. They argue that while the intention is to curb speculation, it could end up pushing traders towards illegal and risky channels. Some experts have also suggested alternative measures, such as increasing investor education and awareness, to address the issue of excessive speculation.
Conclusion: While SEBI’s intention to protect retail investors is commendable, the proposed curbs on the F&O segment have raised valid concerns about the potential resurgence of dabba trading. It is important for the regulator to carefully consider these concerns and strike a balance between curbing speculation and ensuring market liquidity and investor participation.