News Excerpt:

Financial market regulators, SEBI and RBI, are increasingly concerned that the rising volumes in futures and options (F&O) trading are negatively impacting capital formation and posing a systemic risk to India's economic growth.

More detail about news:

• Two years ago, when retail investors were attracted to the F&O segment, the main concern was about their potential losses.
• SEBI focused on educating and warning them, as nine out of ten investors were losing money.

Macro Economic Issue:

• This issue, initially a micro-level concern about retail investor losses, has now escalated to a macro problem within just two years.
• Household savings are being diverted into F&Os, threatening capital formation, investment, and economic growth.

Significant Rise in F&O Trade:

• Data from a recent SEBI bulletin indicates a significant rise in both turnover and the number of contracts traded in the F&O segment.
• The combined turnover of F&O at BSE and NSE increased more than fourfold, reaching Rs 9,504 lakh crore in May 2024 from Rs 2,189 lakh crore in May 2022.
• Similarly, the number of contracts traded surged over five times, from 262 crore to 1,373 crore during the same period.

Why is F&O more attractive?

• The chance of making outsized profits with small sums makes it all the more attractive.
• Investors can take large bets for brief periods with little margin money in the hope of not needing to pay the full money as net positions get settled.
• However, the risks can be very deceptive and tend to catch most lay investors unaware.

Beneficiaries in F&O Trading:

• SEBI is also aware of some market participants who oppose restrictions on F&Os.
• While retail investors typically incur aggregate losses in F&O trading, those profiting are primarily proprietary traders and high-frequency traders.

Hedging purpose diluted:

• The market regulator no longer believes that derivatives trading is solely for low-cost risk hedging for investors and businesses. Much of it is speculation now.

Working Group on Derivative Trading

• SEBI established a working group under the former executive director of RBI, G. Padmanabhan, to examine the derivatives segment and recommend measures for risk management and investor protection.
• The group is nearing the completion of a report to be presented to SEBI's standing committee.

Way Forward:

• While individual choice is important, this issue has grown beyond individual decisions. It now concerns the overall pace and direction of economic growth.
• A significant amount of money is being diverted without good reason, so SEBI must consider this issue at a macro level.