SEBI’s proposed measures to curb F&O speculation

6 Aug 2024

Recently, Securities and Exchange Board of India (SEBI) proposed a series of measures to curtail speculative trading in the index derivatives segment.

This comes amidst concerns about an exponential rise in the volume of trade in the futures and options (F&O) segment, particularly by individual investors.

What are Derivatives?

About: The term derivative refers to a type of financial contract whose value is dependent on an underlying asset, group of assets, or benchmark. These contracts can be used to trade any number of assets and carry their own risks.
- A derivative contract is between two or more parties, where the value of the derivative is derived mainly from fluctuations that occur in the price or value of the underlying assets.
- Derivatives can be used to hedge a position, speculate on the directional movement of an underlying asset, or leverage holdings.
Financial Derivatives: Contracts whose value is derived from underlying financial instruments.
- Examples: Stocks, bonds, interest rates, currencies.
Commodity Derivatives: Contracts based on physical goods.
- Examples: Agricultural products (wheat, corn), energy resources (oil, natural gas), metals (gold, silver).
Index Derivatives: Derivatives based on market indices.
- Examples: Nifty 50, S&P 500.

It involves buying or selling financial instruments, assets, or derivatives with the expectation of making a profit based on future price movements.
Unlike traditional investing, which often focuses on long-term value, speculation is usually aimed at short-term gains and can involve higher risk.

It is a risk management strategy used to offset or reduce potential losses from adverse price movements in an asset or portfolio.
It involves taking an opposite position or using financial instruments to protect against potential negative outcomes.

AIM: The proposed steps aim at enhancing investor protection and promoting market stability in derivative markets.
Annual loss: An annual loss of Rs 50,000 – Rs 60,000 crore of household savings through derivatives trading is a macro concern.
- The same money could get deployed into IPOs, mutual funds or other productive use for the Indian economy.
Excessive speculative trading activity taking place in F&O.
- NSE data shows that retail investors alone account for around 50 per cent of the trading volumes in index derivatives, leaving behind proprietorship traders, foreign investors and domestic institutional investors.
Trading Loss: As per Sebi, the cumulative trading loss incurred by 9.25 million unique individuals and proprietorship traders in the index derivatives of NSE alone stood at Rs 51,689 crore in FY24.
In the Union Budget 2024-25: Finance Minister Nirmala Sitharaman proposed to double the Securities Transaction Tax (STT) on F&O of securities, effective October 1, 2024.
- The STT, which is levied on transactions in specified securities, has been increased to 0.02 per cent and 0.1 per cent, respectively.

It is a tax levied on transactions involving the purchase or sale of securities listed on a stock exchange. It is a direct tax applied to the transaction value and is typically imposed at the time of the transaction.

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