Low Securities Transaction Tax Driving Retail Investors To Options, Says SEBI
Retail investors trading in options due to a low securities transaction tax, says SEBI.
The market regulator may consider measures to curb exposure of retail and individual investors in the derivatives market as low Securities Transaction Tax is driving higher volumes.
The Securities and Exchange Board of India floated a discussion paper on the derivative markets earlier this month. It follows observations made at the June 21 board meet of the regulator, which sought review of the existing regulatory framework for the equity derivative market.
Considering the trading volume in the equity derivatives segment compared to the cash segment and participants’ profile, there may be a need to review the existing regulatory framework for the equity derivative segment, SEBI observed.
High volumes in the derivatives market is primarily due to a low Securities Transaction Tax on options, the regulator said. It is expedient to have only those investors who have a good understanding of derivatives, SEBI said.
Product Suitability Framework
The market regulator observed that the India lacks ‘Product Suitability Framework’ as prevalent in other makets. It allows access to investors based on their risk appetite and financial knowledge of the product.
A large number of individual investors trade in derivatives, the regulator said. Going by their trading pattern in the cash segment, it is observed that these investors may or may not have adequate financial capability to withstand risk posed by complex instruments.
A SEBI study presented to the board revealed that the ratio of equity derivative turnover to the cash market turnover rose more than 10 times to 15.59 in 12 years to March.
Proprietary trades and individual investors contribute 43 percent and 26 percent, respectively, of the volume of the equity derivatives in India, according SEBI.
Around 14 percent of individual investors who have contributed approximately 10 percent of the turnover of equity derivatives segment have not traded in the cash market segment, the regulator said.
More than half of the trading in the derivative segment in the category of individual investors is contributed by investors who have an exposure of Rs 1 crore or more in the cash market, the market regulator observed. Such trading could be speculative in nature.
Developing F&O Market
The regulator also noted feedback regarding introduction of derivative trading in mid-cap indices and exchange-wise position limits. It is also looking at a proposal on inter-operability of clearing corporations. Currently, each exchange has its own exclusive clearing corporation and does not allow interoperability for settlement of transactions.