Praveen Chakravarty, with Anantha Nageswaran and Ajit Ranade, write about SEBI's recent directive to raise the minimum contract sizes of equity derivatives from Rs.2 lakh—a limit that was set in 2000—to Rs.5 lakh. Excerpts below:
"India’s derivatives market is 15 times larger than its cash (shares) market, the highest ratio in the world by a wide margin. Domestic retail investors and proprietary traders account for 87% of all derivatives trading in India. The notional value of such trading touched $1.3 trillion in 2014-15, from just $40 billion a decade ago. Recall that derivatives are inherently a leveraged bet on stock price movements with margin financing. In this context, the recent move by the market regulator is laudable, coming as it does against the backdrop of the recent volatile gyrations of the Chinese equities market that threatens to be the cradle for the next global financial crisis....
Some argue that Sebi’s relatively small increase in contract size from Rs.2 lakh to Rs.5 lakh may not be sufficient for a meaningful marginal impact. However, it surely is a signal that Sebi is cognizant and desirous of raising contract sizes to curb small investor participation in derivatives. Sebi should continue to signal to the market that it will monitor excessive derivatives activity closely and not be shy of increasing minimum contract sizes further....Restoring the balance between investment in shares and complex derivatives trading is an important step in letting stock markets have a purposeful role in the economy. Sebi has taken that step".
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