The issue that used to harm households through activities like gambling, betting, or lotteries is now happening with FATO trading. Everyone from the government to SEBI and RBI is concerned about this.
Reserve Bank of India Governor Shaktikanta Das has stressed the need to address this issue. According to reports, both the Reserve Bank and SEBI are closely watching the increasing trading volumes in the equity derivatives market. In fact, the trading volumes for options and futures have exceeded the country’s nominal GDP.
India’s nominal GDP in 2023-24 was ₹29.53 lakh crore. In contrast, the combined average trading turnover for FAO (Futures and Options) on BSC and NSC in the 2024 financial year was ₹2.62 lakh crore.
Das also mentioned that all economic and financial indicators in India appear stable. If we trust Shaktikanta Das, SEBI is actively dealing with this issue and will take necessary action if needed.
This statement from the Reserve Bank Governor comes at a time when derivatives trading volume on the Indian Stock Exchange is consistently rising. Notably, the trading volume in Indian markets accounts for over 80% of the world’s equity volume. As a result, suspicions of heavy betting in the F.A.O. segment are also increasing.
In April 2024, approximately 8494 crore contracts were traded on NSC, mostly option contracts. Meanwhile, 222.6 crore contracts were traded on BSC during the same period. Globally, there were 13255 crore contracts, with Indian exchanges holding an 81% share.
To address these concerns, SEBI plans to tighten rules related to ANO (Futures and Options) trading. This includes stricter eligibility criteria for trading in futures and options, as well as potential increases in margin requirements.
SEBI also aims to improve net worth disclosure rules for investors. Recently, SEBI sought feedback from the Association of Mutual Funds in India (AMAI) on existing guidelines for derivatives trading and suggestions for further strengthening these rules.
Additionally, SEBI has formed a committee that includes brokerage firms and asset management companies. Their recommendations will help address this issue. The figures from the FAO segment highlight how individual investors are increasingly drawn to derivatives.
In 2024, the monthly trading turnover in the FAO segment reached ₹8740 lakh crore, a significant increase from ₹2217 lakh crore in March 2019. Comparatively, the average daily turnover in the equity cash segment was ₹1 lakh crore, while the FAO segment saw an average daily turnover of around ₹3330 lakh crore.
According to a SEBI study, 89 individual traders incurred losses in FAO trading during the 2021-22 financial year, with an average loss of ₹1.1 lakh per investor. The surge in interest in the FAO segment can be traced back to the COVID-19 pandemic.
Indeed, the growing number of traders participating in derivatives is a concern for regulatory bodies like SEBI and RBI. The increase from 7.1 lakh traders in 2019 to 45.2 lakh in 2021 highlights the growing interest in this segment. The potential risks, including losses affecting households and the need to protect savings, are critical considerations. RBI Governor Shaktikanta Das has emphasized the importance of addressing these issues. We’ll see how SEBI’s stricter rules in the ANO segment impact the market