It Was in News that, The Securities and Exchange Board of India (SEBI), India’s market regulator, intends to connect retail investors’ access to equity derivatives trading to their overall net worth. With this action, risks for smaller investors that suffer losses in the futures market are to some extent reduced.

The permitted volume of trading in equities futures will be correlated to retail investors’ overall wealth, according to a proposal by India’s market regulator. This action is being taken as interest from regular investors increases as Indian stock markets hit new highs. The regulator is worried that if market volatility rises, smaller investors might suffer losses on derivatives.

Retail investor involvement in the equity derivatives market has significantly expanded over the previous three years, up to March, according to data from the Securities and Exchange Board of India (SEBI). This increase has been 500%. In the previous fiscal year, nine out of ten individual traders, mostly in their 30s, suffered losses, with the average loss equal to almost 110,000 Indian rupees ($1,300), according to SEBI research released in January.

In the past, SEBI has mandated that brokers clearly state on their websites the risks related to dealing in derivatives. The regulatory authority is now considering taking further measures, though. According to sources, SEBI is presently debating the implementation of measures intended to monitor and regulate “disproportionate trading” in order to safeguard individual investors. These metrics entail relating the value of futures and options contracts to the earnings and assets of the investors. Due to their lack of authorization to speak to the media, the sources would want to remain anonymous.

The market watchdog, SEBI, has made it clear that there is no plan to limit consumer participation in the derivatives markets. After certain media reports suggested that SEBI was attempting to limit retail involvement in derivative markets, an explanation was provided. According to SEBI, the Master Circular for Stock Brokers dated May 17, 2023, now incorporates the SEBI Circular dated December 3, 2009, which stipulates that the stock broker must have documentary evidence of financial capabilities for all clients in order to conduct derivatives trading.

In order to promote ease of doing business, SEBI is now determining whether the aforementioned circular may be implemented based on client risk assessment. Brokers and investors would benefit from easier compliance as a result.

Furthermore, SEBI has never placed restrictions on trading; instead, it has always prioritized effective risk management, convenience of doing business, and compliance.

The regulator reaffirmed that before any decisions are made by the Board, proposals that result in any modification to the regulatory framework go through a process of thorough consultation with all stakeholders, including the public.