Ajay Bagga’s Concerns About SEBI’s Measures
Market Expert Ajay Bagga Highlights Key Issues:
Ajay Bagga, a renowned market expert, has voiced significant concerns regarding SEBI’s recent measures in the F&O market. He predicts a decline in market volumes and warns that genuine hedging will become more expensive and challenging to execute. According to Bagga, this will result in a shallower market.
The Rise of Dabba Trading
Unintended Consequences:
Bagga also foresees an increase in “dabba trading,” where unregulated providers might step in, posing substantial risks of fraud and tax evasion. This shift could lead to severe market instability.
Impact on Small Traders
Shift to Cash Stocks and Penny Stocks:
As volumes reduce and hedging costs rise, small traders may turn to cash stocks and penny stocks for day-to-day trading. Bagga notes that SEBI’s current focus is not on curbing the intraday equity cash market.
The Removal of Calendar Spread Benefit
Market Stability Concerns:
Experts, including Bagga, express concerns over the removal of the calendar spread benefit on expiry day. This change is expected to impact market stability and increase trading costs.
Positive Intent, But Potentially Harmful Outcomes
Bagga’s Stance on SEBI’s Intent:
While Bagga acknowledges the positive intent behind SEBI’s measures, he argues that increasing lot sizes will disproportionately affect small traders, potentially driving them out of the market. This could inadvertently weaken market depth.
SEBI’s Measures: Detailed Breakdown
Rationalization of Strike Prices
Current and Proposed Practices:
- Current: Nifty and Bank Nifty options have up to 70 and 90 strikes, respectively.
- Proposed: Limit of 50 strikes at contract launch, with uniform strike intervals near prevailing prices.
Upfront Collection of Options Premium
New Requirements:
- Current: Margin collection only for futures and short positions.
- Proposed: Upfront collection of options premiums from buyers.
Removal of Calendar Spread Benefit
Expiry Day Changes:
- Current: Calendar spread margin applies, reducing margin requirements.
- Proposed: No calendar spread margin for contracts expiring on the same day.
Intraday Monitoring of Position Limits
Enhanced Monitoring:
- Current: End-of-day monitoring by MIIs.
- Proposed: Intraday position limit monitoring with a phased implementation.
Increase in Minimum Contract Size
Phased Increase:
- Phase 1: Minimum value set between Rs 15-20 lakh.
- Phase 2: Increase to Rs 20-30 lakh after six months.
Rationalization of Weekly Index Products
Limit on Weekly Expiries:
- Current: Multiple weekly expiries.
- Proposed: Weekly expiry limited to one benchmark index per exchange.
Additional Margin Near Contract Expiry
Margin Hikes:
- Proposed: Additional 3% margin on the penultimate day and 5% on the expiry day.
SEBI’s Rationale Behind the Measures
Protecting Household Savings:
SEBI chief Mahabai Puri Buch highlighted the need to curb excessive speculative trading, citing significant household savings losses in derivatives trading. The goal is to redirect these funds into more productive areas like IPOs and mutual funds.
Expert Opinions on SEBI’s Proposals
Divergent Views:
Experts like Dhiraj Relli from HDFC Securities believe SEBI’s measures will curb market exuberance but may also reduce trading volumes. Jefferies brokerage highlights potential impacts on exchanges and retail brokers, noting that rationalization of weekly options could significantly reduce industry premiums.
Balancing Act Needed:
While SEBI’s proposals aim to enhance investor protection and market stability, experts caution against potential market disruptions. The impact on small traders and market depth requires careful consideration to ensure balanced and sustainable market growth.
