Finance Ministry, RBI and SEBI to form panel assessing derivatives market risks: Report

Derivatives market: Indian financial authorities are planning to establish a committee to evaluate potential stability risks associated with the rapid growth of the country's derivatives market, news agency Reuters reported, quoting two sources familiar with the matter. This committee could recommend policy changes if deemed necessary.

Surge in options trading raises concerns

Options trading activity in India has witnessed a significant surge over the past five years, primarily driven by retail investor participation. The National Stock Exchange of India (NSE) reports that the notional value of index options traded more than doubled in the financial year 2023-24, reaching $907.09 trillion from $447.69 trillion a year earlier.

Financial Stability Development Council to lead initiative

The proposed committee will be formed under the auspices of the Financial Stability Development Council (FSDC). This council comprises prominent figures like the Finance Minister, the Reserve Bank of India Governor, and the head of the market regulator (Securities and Exchange Board of India).

Committee composition and timeline under development

The specific composition of the committee and its reporting timeline are still being finalised and will likely be revealed in the coming months.

The committee will be tasked with evaluating potential systemic risks arising from the derivatives market boom, according to the report.. Additionally, it will explore the need for investor protection measures and enhanced regulatory oversight.

Correlation between unsecured loans and options trading

According to the report, the committee will also investigate a possible correlation between the rise in small, unsecured loans and options trading activity.

"The committee will examine the ultimate use of funds loaned by non-banking financial companies (NBFCs) with broking arms. They will determine if such funds are being channeled into capital market exposure," the source explained, as per the Reuters report.

Central bank data reveals that personal loans, where the end use of funds isn't monitored by banks, have been expanding rapidly at a rate exceeding 20 per cent per year.

A report published by Axis Mutual Fund in October 2023 highlighted that the ratio of the notional value of derivatives traded in India compared to traditional cash market trading stands at a staggering 422 times, the highest globally. In most other markets, derivatives volumes typically represent 5 to 15 times cash market volumes.

High premium turnover ratio:

"Even when considering the premium turnover to cash ratio, India remains an outlier," stated Ashish Gupta, Chief Investment Officer at Axis Mutual Fund. "This ratio exceeds that of most other major global economies." Premium turnover refers to the market value of a contract or its buying/selling price, and is generally lower than the notional value (total contract value).

(With Reuters inputs.)