The Indian financial landscape recently witnessed a significant regulatory shift as the Securities and Exchange Board of India (SEBI) introduced a comprehensive overhaul of its regulations governing the futures and options (F&O) segment. This revamp, a culmination of extensive research and deliberation, marks a pivotal moment in the evolution of India’s derivatives market.

The F&O segment, while offering lucrative opportunities for investors to hedge risks, is also associated with heightened risks and volatility.

To safeguard investor interests, SEBI’s revised framework addresses several key concerns that have plagued the F&O segment in the past. The regulatory changes, rolled out in a phased manner, aim to foster a more robust, transparent, and investor-friendly derivatives market

Revamped criteria

One of the most important aspects of SEBI’s revised F&O regulations is the revamped eligibility criteria for stocks to be included in the derivatives segment. Under the new framework, stocks must meet stringent criteria related to market capitalisation, trading volume, and delivery percentage to be eligible for F&O trading. This move is designed to ensure that only stocks with adequate liquidity and a proven track record are accessible for derivatives trading, thereby reducing the risk of manipulation and excessive volatility.

SEBI has also introduced enhanced risk management measures to protect investors from unforeseen market fluctuations. The new framework mandates stricter margin requirements for F&O positions, which will help curb excessive leverage and prevent a cascading effect during market downturns.

Additionally, SEBI has introduced measures to monitor and control open interest in F&O contracts, which can be a potential source of systemic risk if left unchecked.

To bolster market integrity and deter manipulative practices, SEBI has strengthened its market surveillance mechanism for the F&O segment. The regulator has implemented advanced surveillance systems that leverage artificial intelligence and machine learning algorithms to detect patterns of suspicious trading activity. This proactive approach will enable SEBI to take swift action against market participants who engage in manipulative practices, thereby instilling greater confidence in the F&O market.

SEBI has also emphasised the importance of transparency and investor education in its revised F&O regulations. The regulator has mandated that stock exchanges and clearing corporations disseminate comprehensive information about F&O contracts, including their risk profile, margin requirements, and open interest data. This will enable investors to make informed decisions and avoid taking undue risks.

Further, SEBI has launched several investor education initiatives to enhance awareness about the risks and rewards of F&O trading. SEBI’s revamped F&O regulations are expected to have a significant positive impact on investor protection. The strengthened market surveillance mechanism will deter manipulative practices and ensure a level playing field for all market participants.

SEBI’s comprehensive overhaul of its F&O regulations is a welcome step towards creating a more robust and investor-friendly derivatives market in India. The revised framework, with its focus on stricter eligibility criteria, enhanced risk management, and strengthened market surveillance, is expected to significantly enhance investor protection and foster a more transparent and efficient F&O market.

While the implementation of these regulations may pose some challenges, their long-term benefits for the Indian financial market are undeniable.

Saravanan is a professor of finance and accounting at IIM Tiruchirappalli and Williams is the Head of India at Sernova Financial

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