Securities and Exchange Board of India (Sebi) chairman Tuhin Kanta Pandey caused more than a mild flutter in the market on Thursday, when he said that the market regulator is planning to increase the tenure and maturity of equity derivative contracts.
“All this will be done in consultation, in what form, how, when… Yes (there will be a consultation paper). I can’t tell you when, but that is the thinking process we have,” Pandey said at the sidelines of the FICCI Capital Markets Summit in Mumbai.
A consultation paper in this regard will be initiated after taking opinions from the stakeholders, he added.
Reacting to his comments, there was a steep fall in some of the major listed stocks linked to capital markets. The shares of Angel One and Bombay Stock Exchange fell 6.7% and 7.5%, respectively. Other brokerage firms such as Master Trust dropped 7% while Arihant Capital closed down 2%.
Industry Reaction: A Pushback on Shorter Expiries
Earlier this week, BSE MD & CEO Sundararaman Ramamurthy told FE, “We feel that we need to educate market participants on the importance of monthly products and their benefits for arbitrage or hedging. So, we are in the process of doing so. At some point, this will have its impact.”
However, all brokerages are not very happy with the market regulator’s push. “The wording was strong. We are going back in time, when 10 years back there were only monthly expiries. To control speculation, there were other tools like increasing the lot size and greater net-worth criteria. Some markets have daily expiries. It makes hedging more efficient and provides higher liquidity,” said the chief executive (CEO) of domestic retail brokerage.
Another market expert added that with the rise in tenure, retail investors who have taken fancy to such products are likely to lose interest because the waiting period will be longer. This will help the cash market – an important objective of the market regulator.
The Rationale: Curbing Losses and Shifting Focus
The regulator is aiming to tighten the excessive speculation in the derivatives market. Its recent studies have indicated that more than 90% retail investors continue to incur significant losses.
“Improving the tenure really means whether we can have more longer-term derivatives. Qualitatively we have to see but we have to calibrate it. My statement says in a calibrated manner. This is only in-principle we’re stating, on what we should be doing,” Pandey said.