Mumbai, India : Securities and Exchange Board of India (SEBI) Chief Madhabi Puri Buch has strongly emphasized the need to maintain the integrity of the financial markets, warning against potential “Paytm-like contamination.” Her remarks come amid growing concerns about systemic risks and the integrity of the KYC (Know Your Customer) process within the financial ecosystem.
Speaking at a National Stock Exchange (NSE) event, Buch highlighted the importance of the existing KYC Registration Agency (KRA) system, which ensures that once a KYC is validated, it need not be repeated in the capital markets. She argued against allowing individual intermediaries to conduct KYC processes, citing the example of Paytm Payments Bank, which faced restrictions from the Reserve Bank of India on January 31 due to irregularities in its KYC processes.
Securities and Exchange Board of India (SEBI)
“If we allowed Paytm into our system without a KRA, it would contaminate the entire system. We cannot allow that,” Buch stated, underlining SEBI’s commitment to preventing fraudulent activities and ensuring market stability.
Households Losing Rs 60,000 Crore Annually in F&O Segment
Buch also addressed the alarming financial losses incurred by households in the futures and options (F&O) segment, estimating these losses to be around Rs 60,000 crore annually. She pointed out that such losses not only affect individual investors but also pose macroeconomic concerns, diverting funds that could otherwise be productively invested in IPOs, mutual funds, or other financial instruments.
A SEBI study found that 90% of trades in the F&O segment result in losses, prompting the regulator to propose tighter regulations on derivatives trading. The proposals include upfront payment of option premiums, increasing the minimum contract size for index derivatives, tighter position limits, and higher margins near expiry.
Proposed Measures to Curb Speculative Trading
To address the risks associated with speculative trading, especially on expiry days, SEBI has suggested several regulatory changes:
1. Upfront Collection of Option Premiums:** Buyers may be required to pay the premium upfront rather than upon exercising the option.
2. Increased Minimum Contract Size The minimum value of derivatives contracts is proposed to increase in two phases, starting from Rs 15-20 lakh and later to Rs 20-30 lakh.
3. Tighter Position Limits and Higher Margins To monitor and mitigate risks, SEBI proposes increasing margins by 3% a day before expiry and an additional 5% on expiry day.
4. Rationalization of Weekly Index Products The regulator is considering limiting weekly options contracts to a single benchmark index to reduce market volatility.
5. Strike Price Adjustments and Calendar Spread Benefit Removal:** SEBI plans to introduce a more structured approach to strike prices and remove the margin benefit for calendar spread positions on expiry days.
These proposed measures aim to create a more stable and investor-friendly derivatives market. SEBI has invited public comments on these proposals, which are seen as crucial steps in safeguarding retail investors and ensuring market integrity.
As retail participation in derivatives trading has surged, rising from 2% to 41%, SEBI is under pressure to address the risks associated with this trend. The regulator’s proactive approach underscores its commitment to protecting investors and maintaining a robust financial system.
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