Sebi bans mini-derivative contracts on stock exchanges five years after launch

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SummaryThe Securities and Exchange Board of India (Sebi) has made it clear that it is not in favour of small investors trying their luck with complex derivative (F&O) products.

Move meant to deter small investors from trying luck with complex F&O products

The Securities and Exchange Board of India (Sebi) has made it clear that it is not in favour of small investors trying their luck with complex derivative (F&O) products.

The capital market watchdog has directed stock exchanges to discontinue mini-derivative contracts on Sensex and Nifty that were essentially launched to attract retail investors to the F&O segment.

“With a view to ensure that small/retail investors are not attracted towards derivatives segment, it has now been decided to discontinue mini-derivative contracts on index (Sensex and Nifty),” stated the Sebi circular.

Interestingly, the circular has taken most market intermediaries — especially stock exchanges — by surprise as they say that there was not much discussion with the bourses on this matter and the regulator chose to come directly with a diktat.

The latest move by the regulator is also, in a way, a U-turn when compared to the stance it took in 2007 when it approved the launch of such mini-contracts with the criteria that the minimum contract size would be R1 lakh.

The lower contract size was primarily aimed at attracting small investors to the derivative market.

In December 2008, a report by the derivatives market review committee — under the chairmanship of M Rammohan Rao — had said that “based on the experience with mini-contracts in index futures and options, introduction of mini-contracts in single stock F&O could be considered.”

The regulator's move would, however, impact a significant part of the market as exchange data clearly shows that mini-contracts on Sensex and Nifty had a combined daily turnover in the range of R250-R300 crore.

The step also reiterates chairman UK Sinha's oft-repeated warning aimed at market intermediaries indulging in mis-selling of products.

At various investment conferences, the Sebi chairman has said that fund managers and brokers should desist from selling risky and complex products to uninformed investors.

Meanwhile, the Sebi circular has further said that no fresh mini derivatives contracts can be issued though the existing unexpired contracts will be permitted to trade till expiry and new strikes can also be introduced in the existing

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