SEBI Clarifies: No Intention To Restrict Retail Participation In Derivative Markets

This clarification has come amidst media speculations on curbing retail participation in Future and Option (F&O) segments.
SEBI Clarifies: No Intention To Restrict Retail Participation In Derivative Markets

As the equity market is soaring, the market regulator is becoming more vigilant about investors’ interests and seeking to reduce the risk for retail investors rather than restricting them from participating. On July 29, 2023, the regulator clarified, “There is no proposal to curb retail participation in derivative markets.”

Its press release references its master circular for stock brokers issued on May 17, 2023, prescribing that they must have documentary evidence of financial capability for all clients. With effect from May 1, 2023, the regulator has put in stringent norms on margin requirements by the brokers. Earlier traders used to take higher margin facilities offered by brokers to trade in the riskier segment of the future and option segment, which was up 30-40 times the client's fund. For instance, if you have Rs 5,000 in your trading account and the brokers give a 40X margin, you could do intra-day trade of up to Rs 2 lakh, which is impossible now.  

On January 25, 2023, the Sebi published a study titled “Analysis of Profit and Loss of Individual Traders Dealing in Equity F&O Segment", which looked at trade data only from FY19 and FY22. The study revealed, "Nine out of 10 individual traders in the equity futures and options segment experienced net losses. On average, the traders made a net trading loss of around Rs. 50,000.”

In terms of the number of traders, the study found that individual traders in the equity F&O segment grew by over 500 per cent between FY19 and FY22. There were 7.1 lakh traders during FY19, which rose to 45.2 lakh during FY22. Out of this, 88 per cent are deemed as active traders.  

Among the loss-making traders, it was found that the average loss was Rs 1.1 lakh in FY22. On the other hand, among the active profit-making traders, it was discovered that the top one per cent of traders alone account for nearly 51 per cent of total net profit.  

It is also noteworthy that the regulators have mandated that all the stock brokers now start displaying risk disclosures to their clients on their websites from July 1, 2023. This was done to enhance investor awareness and informed decision-making. While announcing this in a circular, Sebi said it was motivated to press for the disclosure based on the findings from the study.  

The capital markets regulator found that in the fiscal year 2022, the number of unique individual traders trading through the top 10 brokers increased by over 500 per cent compared to FY19, reaching 4.52 million. However, 89 per cent of these traders incurred losses, with an average loss of Rs. 1.1 lakh, while only 11 per cent made a profit, averaging Rs. 1.5 lakh.

Sebi further clarified in the release that “SEBI's focus has always been on adequate risk management while ensuring ease of doing business and compliance, rather than on placing any curbs on trading. It is reiterated that proposals which result in any change in the regulatory framework go through a process of comprehensive consultation with all stakeholders, including the public, before any decision is taken by the Board.”

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