SEBI’s Derivatives Crackdown: Balancing Access and Risk

The Securities and Exchange Board of India (SEBI) is considering measures to control the rapid growth in derivatives trading. These steps could impact accessibility for small retail investors, especially option buyers. Let’s break it down:

1. Minimum Lot Size Increase: SEBI proposes raising the minimum lot size for derivative contracts from the current ₹5 lakh to ₹20 lakh-₹30 lakh. This change aims to address the high skew in options trading, where a small percentage of retail traders drive most premiums.
2. Weekly Options Restriction: SEBI plans to limit weekly options to one expiry per stock exchange per week. This move could simplify trading and reduce speculative activity.
3. Strike Price Limit: The regulator also wants to restrict the number of strike prices for options contracts. Fewer choices might make options trading less complex for retail investors.
4. Historical Parallels: Looking at Korea and China, we see similar situations. Korea’s speculative bubble in options trading led to regulatory intervention, resulting in a collapse in volumes. China faced a decline in futures trading volumes after raising margin requirements.

In summary, SEBI aims to balance accessibility and risk in derivatives trading.