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The Securities and Exchange Board of India (SEBI) is reportedly considering tighter access to derivative trading through new suitability norms, a move that has sparked a debate among industry experts regarding its timing, scope, and potential impact on the market.
To understand what these potential changes could mean for market participants, CNBC-TV18 spoke with K. Suresh, President of the Association of Exchanges Members of India (ANMI), and Rajesh Baheti, Managing Director of Crosseas Capital Services.
Rajesh Baheti, while having previously favoured eligibility criteria over product-related tweaks, expressed concerns about the timing of these new proposals. He pointed out that recent regulatory changes have already led to a moderation in exchange volumes and brokerage incomes.
Baheti argued for the need to differentiate between traders who are betting their salaries without other financial backing and those who have the necessary savings to absorb potential losses.
Representing the brokerage community, K Suresh highlighted the industry's pushback against recent regulatory actions. He said ANMI has written to SEBI requesting the restoration of Bank Nifty weekly contracts. Suresh quantified the impact of their removal, stating it has caused a "45% dip in the options volume," which has directly affected brokers' income and put employment in the sector at stake.
These are verbatim excerpts of the interview.
Q: SEBI is reportedly considering tighter access to derivative trading through new suitability norms. Given your earlier stance favouring eligibility-based criteria over other restrictions, what are your first thoughts on this possible move?
Baheti: Between the two, like tweaking of products or reducing the number of expiries and putting an eligibility criteria, I was always favouring the eligibility criteria. But I think SEBI has gone on an overdrive to deny many rumours surrounding this after the changes they have introduced, and we clearly see that the exchange volumes and brokerage incomes have moderated. So, I don't know whether this is the right time to go ahead and push for further reform, or wait for the new data to settle, look at what's happening and then probably come out with a paper.
Because even though SEBI has conducted a study that says that 90% or 95% of retail loses money, it's very important to understand what part of that retail it is. Are these the people who have no other savings, and then they are these people are betting their salaries, or these are the people who have other savings have the necessary wherewithal to bear these losses. So, they should do a little bit of a deeper study before coming out with a criteria that can hurt the market, rather than target what they want to target.
Q: Earlier, when this issue was discussed, you had suggested certain threshold levels that you felt were appropriate. Do you still believe eligibility norms are the right approach, or do you think this is not the right time to introduce them given that market volumes have already declined after recent measures?
Baheti: Yes, give it some time, let the market settle, and then maybe understand what part of retail is losing money, and make sure that you are not targeting the entire market because changing of the products and expiries targeted an entire market. It didn't kind of hit only retail or what they wanted to do. So, this time, you have to be very sure who your target is, and therefore what you are trying to reduce doesn't kind of work the market in other ways.
Q: ANMI has written to SEBI on restoration of Bank Nifty weekly contracts. While we are talking about more steps, and Rajesh kind of says that, now is not the time you are asking to give what they've already done a relook, restoring Bank Nifty contracts. Tell us what you what you've written to SEBI, what's the crux of the argument?
Suresh: Argument is on many accounts. First of all, there is a disruption in the volume of business to the extent of 45% dip in the options volume, which directly affects the brokers income. We must also keep in mind that broking is also an industry. We are directly and indirectly giving employment to many people. We are also adopting technology, so that way we are supporting the whole ecosystem. So here we have to see that the employment at stake because of revenue reductions. We have to think from that angle also.
Second thing is that Bank Nifty is one of the best instruments available, that to weekly expiry for short term hedging. It was available. When it was abruptly removed, what happened again is that there is a disruption in these strategies by the traders and others. You have to spend huge money if you take a long-term contract instead of going for a weekly contract. So there is disruption in the strategies.
ANMI always feels that there is room for educating people, rather making everything stop. What we advocate is that we must educate the investors, particularly for the F&O segment, so that there will be an informed investor who will come and play. Otherwise, somehow this will lead to a lot of problems. Once again, from SEBI angle, we are agreeing with them that 96% of the people losing.
Q: Is this just a letter, have you had discussions with SEBI officials on this?
Suresh: No, we have only sent a letter and we are yet to receive a call from SEBI on discussion.
Q: Which went out about a month ago.
Suresh: Roughly around 15-20 days back.
Q: Regulators also have to look at the larger picture including concerns around the gamification of trading, especially in weekly options. How do you view this issue?
Baheti: There are two issues to this. One was SEBI said one expiry per week per exchange and then SEBI said one contract per week per exchange. If SEBI had just said that let us have one expiry per week per exchange, then NSE, assuming that Bank Nifty was not removed from the weekly contracts, would have to expire both the Bank Nifty and Nifty on the same day.
And let us say, I have X capital and I want to use it on a zero day, or whatever SEBI is coming to stop, I only have that one opportunity, one day a week, on the NSE and I can do it either on the Bank Nifty or Nifty. So, to that extent, stopping the number of contracts was not such a great idea.
Maybe you would have achieved exactly the same result by just saying one expiry per week per exchange. You can expire any number of contracts you want to during the same day, so that a capital can only be used once. You can either use it for this contract or that contract and to that extent would have had better diversification of risk across markets.
I agree with ANMI that Bank Nifty can be reintroduced, but perhaps not on a separate expiry day if SEBI wants to control the volumes, you have to merge it with the Nifty expiries.
Q: If thresholds are to be introduced to restrict retail participation in complex F&O products, what kind of criteria should regulators consider? Is linking F&O access to a minimum cash balance the right approach, or is there a more effective way to ensure investors truly understand the risks?
Baheti: I would speculate that a suitable criterion could be requiring investors to have at least ₹5 lakh in capital market savings—whether through direct equities, mutual funds, or other instruments. If someone maintains that level of savings, they could be allowed to trade in F&O. This would naturally exclude those at the lowest rung who don’t have meaningful savings and instead use their daily, weekly, or monthly salary to buy options on expiry days, treating it almost like a lottery. If the aim is to curb that kind of behaviour, this approach would work better than restricting products.
Q: What kind of thresholds will be palatable to the broker community?
Suresh: There was an apprehension earlier that Bank Nifty is manipulated, etc. Now the realignment has happened to that index. So, it's well balanced now, and the room for manipulation is gone. When there is no room for manipulation nothing wrong in introducing that.
From brokers point of view, mainly the income already reduced to a great extent, and it has affected the functioning of every broker, particularly large brokers also. So, from that angle, the employment is also at stake, we are losing many people employed in that segment, as we argued many years back, we need industry status for broking, because we are directly, indirectly contributing to the economy of the country. From that angle, my view is that reintroduction of Bank Nifty is a must for bringing back the necessary hedging instrument, as well as bringing of the volumes and also providing another variety of product, for the investors as well as for the other players in the market.
