From UPSC perspective, the following things are important :
Prelims level: FandO Trading
Why in the News?
SEBI has introduced a six-step framework to protect investors and curb speculative trading, specifically targeting futures and options (F&O) trading by reducing volumes on expiry days and limiting retail participation.
What are the Future and Options (F&O)?
- Futures are contracts to buy or sell an asset (like stocks, indexes, or commodities) at a predetermined price on a future date.
- Options give the right, but not the obligation, to buy or sell an asset at a set price before a certain date.
SEBI’s Six-Step F&O Framework (Effective November 2024 – April 2025):In response to concerns about rising speculative trading, SEBI has outlined six key measures aimed at reducing retail interest in F&O trading:
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Key Changes for Retail Investors:
- Upfront Collection of Options Premiums: Retail investors must now pay the full premium upfront, limiting their ability to use high leverage in options trading.
- Increased Contract Size: The minimum contract size for index derivatives is raised to ₹15 lakhs, reducing speculative retail participation by making it costlier to enter.
- Rationalization of Weekly Expiries: Only one benchmark index per exchange can have weekly expiries, lowering speculative trading opportunities and intraday volatility.
- Removal of Calendar Spread Benefits: Calendar spreads are no longer allowed on expiry days, discouraging aggressive trading strategies.
Impact on Brokers and Revenue:
- Decline in Trading Volumes: Brokers reliant on F&O trading will see reduced volumes due to fewer retail participants and higher barriers to entry.
- Revenue Drop in Options Trading: Firms like Zerodha may face a 30-50% revenue drop as retail participation in options decreases.
- Shift to Equity Trading: Retail investors may move towards equity trading, causing brokers to adapt their offerings.
- Adaptation for Brokers: Brokers with a balanced mix of cash and derivatives will be less impacted, while those focused on F&O need to shift strategies.
PYQ:[2021] With reference to India, consider the following statements: 1. Retail investors through demat account can invest in ‘Treasury Bills’ and ‘Government of India Debt Bonds’ in primary market. 2. The ‘Negotiated Dealing System-Order Matching’ is a government securities trading platform of the Reserve Bank of India. 3. The ‘Central Depository Services Ltd.’ Is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange. Which of the statements given above is/are correct? (a) 1 only (b) 1 and 2 only (c) 3 only (d) 2 and 3 only |
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