Sebi warns investors on derivatives

The Securities and Exchange Board of Indias derivatives panel has recommended the introduction of new derivative products...

The Securities and Exchange Board of Indias derivatives panel has recommended the introduction of new derivative products like lower-value contracts on individual stocks to increase the participation of retail investors in the futures and options segment. The mini contract could be a fourth or a tenth in size of a normal derivative contract,it said.

The panel also warned small investors against taking aggressive positions in the futures segment,while recommending introduction of new products for the savvy trader. Noting that small individual investors could protect their investments by hedging their risks in the options market,the report said,They should carefully consider taking positions on future markets because mark-to-market losses resulting in margin calls could wipe out small individual investors.

Sebis Derivatives Market Review Committee,whose final recommendations were published by the regulator on its website for feedback,has also suggested extension of longer-term options of up to three years to more equity indexes and to individual stocks. Mini-contracts with the Sensex and the Nifty as underlying and longer-term options on Nifty are already being traded on the basis of the committees interim recommendations.

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The current minimum contract value of mini-derivative contracts with Nifty as underlying is Rs 1,00,000,compared with Rs 2,00,000 for normal contracts.

It has recommended futures and option contracts on volatility indexes as well as formation of corporate bond and government bond indexes and futures and option products based on these indexes. It has also suggested introduction of cross-currency contracts. The new products in the derivatives segment,the Sebi committee report said,needs to be carefully designed to meet the needs of various class of investors.

The report of the committee has also recommended relaxation of the Securities Transaction Tax,which,it added,should be charged on price or premium of options and not on quantum or notional value of deal.