The Securities and Exchange Board of India (Sebi) on Wednesday floated a discussion paper proposing to overhaul its norms for derivatives trading, including norms on suitability of complex and risky products for individual investors. Sebi said that while large number of individual investors are active in derivatives segment, it has been observed that these investors may or may not have adequate financial capability to withstand risks posed by complex derivative instruments.
“In the absence of a product suitability framework, this may not be in the interest of securities market,” said Sebi. The regulator has invited public comments on the discussion paper by August 10.
According to the discussion paper, with the new rules, the market watchdog has sought to address any inefficiencies currently present in the market and any regulatory arbitrage that needs to be plugged.
Sebi has also sought the global best practices and experience in international markets to align cash and derivative markets.
“The ratio of turnover in derivatives to turnover in cash market is around 15 times. To what extent the drivers of this ratio in India are comparable with drivers in other markets,” said Sebi.
The comments have been sought on all issues related to trading in derivatives, participants’ profile, product mix and stock eligibility to further strengthen the framework in line with the emerging trends and global best practices.
The discussion paper also seeks to understand what measures would be required to create balanced participation in equity derivatives market and what could be the guiding principles for setting minimum contract size and open position limits for equity derivatives, considering the participants’ profile and other factors.