SEBI Targets New F&O Rules to Safeguard Retail Investors and Limit Risks

The Securities and Exchange Board of India (SEBI) is exploring new regulations aimed at strengthening protections for retail investors in the futures and options (F&O) segment of the equity market. This move comes as part of SEBI's ongoing efforts to reduce the exposure of small investors to the high-risk dynamics often associated with F&O trading.

According to New Indian Express, an official from the National Stock Exchange (NSE), the country's largest equity exchange, said that SEBI is considering these measures as a response to the “vagaries of the F&O market” that can pose significant financial risks for inexperienced retail investors.

Sriram Krishnan, Chief Business Development Officer, NSE, said to New Indian Express that, “While the regulator has already made some changes to restrict F&O trading, we have approached the regulator to bring in investors eligibility requirements like those for investment in Alternative Investment Funds (AIFs). The Sebi has said it may consider these measures as part of the second round of changes.”

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

He also mentioned that the proposed regulatory framework may introduce investor eligibility criteria, resembling the requirements imposed on those investing in Alternative Investment Funds (AIFs). SEBI may consider these measures in the second phase of regulatory changes.

In line with his recommendation for stricter eligibility criteria, Krishnan emphasized the importance of defining “how much one can trade”. “You define investor eligibility framework, and disproportionate trading framework, which means you define how much one can trade. That's the way you can protect the investors and prevent them from going into certain products,” he explained. 

SEBI may also introduce a framework for accredited investors in F&O trading, similar to the criteria for investing in hedge funds and private equity, which require investors to meet certain net worth thresholds. Currently, individuals wishing to invest in AIFs, such as hedge funds and private equity, must meet minimum financial thresholds, including a liquid net worth of at least Rs 5 crore and an annual gross income of Rs 50 lakh.

SEBI has already introduced several reforms to curb speculative trading in the F&O space. Some of the changes include raising the minimum lot size by up to three times, limiting weekly contract expirations, levying a 2% extreme loss margin (ELM) on short index positions, and increasing securities transaction tax (STT) on transactions. These adjustments are being implemented gradually starting in October this year with, the final phase set for completion by April 2025.

In Conclusion

The Securities and Exchange Board of India (SEBI) is contemplating the introduction of stricter regulations for retail investors involved in the futures and options (F&O) segment of the Indian equity market. This potential move is designed to protect smaller investors from the high risks inherent in F&O trading. 

Krishnan noted that there has been no noticeable change in F&O trading volumes yet, but the effects of the new measures are expected to become evident by January and February. Industry experts anticipate that these measures will contribute to a more stable and regulated F&O market in India.