The market regulator does not plan to take more measures to restrict activity in derivatives, but there was a need to better measure risks, a senior official said on Saturday.
“Derivatives are good for the market ecosystem as they help in price discovery and create depth in the market,” Ananth Narayan, Whole-Time Member of SEBI, said at an event organized by NISM. “Most of the regulator’s recent actions on the F&O side have been aimed at reducing activity in index options at expiration. We are in no rush to take further steps and will see how things develop.”
He added that SEBI is not considering any steps on “suitability and suitability”, to determine who can trade in the derivatives market.
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Narayan said there should be some semblance of balance between the cash and derivatives markets. “In the derivatives segment we are trying to measure risk better. “Having a skewed market where volumes in one segment (derivatives) dominate the other (cash market) could create conditions that lead to manipulation and unnecessary volatility,” he said.
According to him, open interest today is measured in terms of the notional value of futures and options together. This may not be correct and the regulator is in discussions to move to a delta-based matrix that would ensure risk is measured correctly.
“This is a classic example of adding apples and oranges, the two are not equivalent. Moving to a delta-based matrix would ensure that we measure risk correctly,” Narayan said.
The regulator is also considering linking the market-wide position limit to average daily delivery volumes in the spot market on a dynamic basis. Currently, the market-wide position limit is 20 percent of the free float.
“What we see in stock futures and options is that the actual risk incurred in a given stock is several times the daily average volume of the underlying stock,” Narayan said. “If you have indices that trade F&O, there should be restrictions on the weighting of the top stocks. This is a matter of debate.”
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According to Narayan, the way in which the exposure of mutual funds and AIFs to derivatives is measured is incorrect and could be made more realistic to provide a better understanding of what the risks are in the system.
An expert group led by former RBI director G Padmanabhan is working on ease of doing business and better risk management, he said.
