Rapid upsurge in derivatives trading may pose challenges for investors: RBI

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

The rapid increase in futures and options (F&O) trading volumes in recent years could pose several challenges as market fluctuations impact retail investors who do not follow proper risk management, a Reserve Bank report has said. These fluctuations may have an impact.

Recent years have witnessed increasing participation of retail investors in the equity derivatives segment. This has increased by 42.8 percent from 65 lakh during 2022-23 to 95.7 lakh during 2023-24.

RBI’s Bi-Annual Financial Stability Report (FSR) said that while trading volumes in the derivatives segment have seen a predictable growth over the last few years, trading volumes have observed a linear growth pattern when measured by premium turnover. The ratio of premium turnover to cash market has remained stable over the last three years.
The FSR said equity derivatives markets can improve price discovery and increase market liquidity in the underlying cash markets. However, it is also associated with higher risks.

According to report “Since derivatives are more complex than the basic, investor protection is a key regulatory obligatory,”. A SEBI research published in January 2023 showed that 89 percent of individual participants in F&O lost money in the segment during financial year 2018-19 and financial year 2021-22.

“…the rapid growth in F&O volumes in recent years may pose several challenges: retail investors may be exposed to sudden market fluctuations without proper risk management and this may have an impact on the cash market; The rise in popularity of short-term options and higher volatility in some equity indices may increase leverage…,” the report said.

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

SEBI has revised the stress testing methodologies and scenarios for calculation of corpus of Settlement Guarantee Fund (SGF), core SGF, to create a more flexible settlement system to meet contingencies arising due to failure to honor obligations by any member. In the process of review. A stock exchange.

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