Kotak Warns Of 'Crushing And Lasting Impact' Of Possible SEBI Guardrails On Derivatives Trading

The Securities Exchange and Board of India's (SEBI) planned regulations to curb futures and options trading will make it difficult for retail investors to access options trading to retail investors, says Kotak Institutional Equities. 

What Happened: Media reports on Tuesday suggested that the SEBI working committee had offered recommendations aimed at reducing retail participation in futures and options. Suggestions included increasing the minimum lot size of derivative contracts from ₹5 lakh to ₹20-30 lakh, a restriction on weekly options to just one expiry per stock exchange per week and a limit on the number of strike prices for options contracts.

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Kotak said the increasing lot size and fewer weekly expiries could reduce retail trading volumes as 20% of retail traders likely drive 90% of the premiums. Other recommendations like higher margin requirements closer to expiry day and intraday monitoring of position limits would restrict non-retail volumes, the research firm said. 

According to Kotak, the key issue is not the average losses in derivative trading, it is more about the accessibility of a complex product that has a higher probability of incurring losses.

This is proven when investors compare the alternatives to trade in equities, intraday, delivery, futures and options. Options are the most complex product among them, with a lower cost in terms of ticketing size and transaction costs and provide the highest leverage. 

Kotak compared the recommendations to regulatory interventions in the past by China and South Korea for futures and options, respectively, which led to a "crushing and lasting impact" on derivative volumes in both these countries. 

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