Rapid Rise In Derivatives Trading Could Pose Challenges For Investors: RBI

The rapid rise in Futures and Options (F&O) trade volumes in recent years could pose several challenges as retail investors not following proper risk management could be impacted by sudden movements in markets, said a Reserve Bank report.

The equity derivatives segment has been witnessing growing participation from retail investors in recent years. It has gone up by 42.8 per cent from 65 lakh during 2022-23 to 95.7 lakh during 2023-24.

While trading volumes in derivatives segment has seen exponential growth over the years in notional terms, the trading volumes when measured by the premium turnover has witnessed a linear growth pattern, said the RBI's bi-annual Financial Stability Report (FSR).

The ratio of premium turnover to cash market has remained steady over the last three years.

FSR said equity derivatives market can improve price discovery and enhance market liquidity in underlying cash markets. It, however, is also associated with higher risks.

"Since derivatives are more complex than the underlying, investor protection is a key regulatory imperative," the report said.

A SEBI research published in January 2023 showed that 89 per cent of individual participants in F&O lost money in the segment during fiscal year 2018-19 and fiscal year 2021-22.

"...the rapid rise in F&O volumes in recent years could pose several challenges: retail investors could be impacted by sudden movements in markets without proper risk management and this could have knock-on effects on cash market; rise in popularity of shorter-duration options in indices with few stocks and high volatility could amplify leverage...," the report said.

The Securities and Exchange Board of India (SEBI) has instituted an expert working group, under the Secondary Markets Advisory Committee, to review F&O markets from the perspective of investor protection as well as overall systemic risk management.

SEBI is also in the process of reviewing the corpus of the Settlement Guarantee Fund (SGF), stress testing methodologies and scenarios for computation of core SGF to build a more resilient settlement system to meet contingencies arising due to failure to honour obligations by any member of a stock exchange.

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