The Securities and Exchange Board of India (Sebi) has proposed new rules to squelch excessive speculation in equity derivatives.
Equity derivatives are contracts between investors to buy or sell an underlying asset at a future date and price. They derive their value from the underlying stock or equity indexes.
The market regulator plans to change the manner in which open interest (OI) is calculated from notional terms (based on the total value of an underlying asset) to `Future Equivalent (FutEq) or Delta approach.
Open interest in the derivatives markets is the overall outstanding positions held by all participants.
According to Sebi, the current method is prone to manipulation that could include artificially pushing up a scrip into the ban period or obscuring the true risk exposure of certain positions.
A stock is placed in the ban period when the combined OI reaches 95 per cent of the market wide position limit (MWPL).
Sebi pointed out that under a notional approach, participants could potentially take large notional positions in options to push the combined OI close to the MWPL, triggering a ban.
Futures and options are the two types of derivatives.
A Futures contract is a legally binding agreement to buy or sell the underlying security on a future date whereas an options contract gives the buyer or holder of the contract the right (but not the obligation) to buy or sell the underlying asset at a predetermined price within or at the end of a specified period.
It is, therefore, proposing the FutEq which will measure the OI not by the total value of the contracts, but how much a particular contract moves with its underlying asset or its price sensitivity.
The market regulator has sought public comments on the proposals till March 17.
Under the proposals, Sebi has also mooted that market participants should receive intraday snapshots of Futures & Options (F&O) OI in near real-time. It said this will help in better risk management and decision-making.
The market regulator under chairperson Madhabi Puri-Buch had tightened derivatives rules in a bid to bring down excessive speculation and safeguard retail investors who were showing excessive interest in this segment of the capital markets.
Last October, the market regulator imposed a set of restrictions to curb highly speculative trades in the F&O market after data indicated that retail investors were losing money in 93 per cent of their trades over the last three years. It raised the minimum trading amount, rationalised the weekly expiry contracts and mandated upfront collection of option premiums.
In January this year, Sebi’s whole-time member Ananth Narayan said that the regulator was not planning any more measures to curb or restrict activity in derivatives.