Sebi committee bats for higher lot size, limited weekly contracts to curb F&O volatility

In order to curtail trading in the futures & options (F&O) segment, the working committee has recommended increasing the minimum lot size of derivative contracts to Rs 20-30 lakh, which is currently at Rs 5 lakh, suggest a report from MoneyControl citing sources.

The move will restrict weekly options to only one expiry per stock exchange per week, and limit the number of strike prices for the options contracts as key measures to curb the uncontrolled rise in the derivative volumes, the report MoneyControl said.

The capital markets watchdog Sebi appointed an expert working committee last month to address the issue of excessive speculation in the F&O segment, driven by rising retail participation in the last few years. If the committee's suggestions are accepted, two measures are to have the most impact on the volume.

First, the small ticket traders will be eliminated if the contract size is steeply increased due to unaffordability. Second, traders will have a narrow field to play as the weekly expiry number shall be limited, if approved. Other proposals include fewer strike prices, upfront collection of option premiums from option buyers, intra-day monitoring of position limits, and more, the report said.

Market veterans have observed that most weekly contracts offer little economic benefit because they are predominantly used for speculation rather than their intended purpose of hedging. Hedging is meant to mitigate risk by taking offsetting positions in the market to protect against price fluctuations.

However, these short-term contracts are typically exploited by traders looking to profit from rapid price movements, rather than by businesses seeking to manage long-term risks. As a result, the original purpose of these contracts—to provide stability and predictability in the market—is often undermined.

The multifold rise in derivatives volumes in India in the last few months has been drawing the attention of the market watchdog as a cause for concern. According to Sebi, the overall derivative turnover has jumped to Rs 500 lakh crore in FY24 from Rs 210 lakh crore in FY18.

There are ample instances and evidence, which suggest that many novice individuals borrow money to trade options, to mint a quick buck from the highly risky F&O market. Even a Sebi study suggests that about 9 out of 10 retail traders lose money on options bets with an average loss of Rs 50,000.