‘No Aptitude Test Needed’: SEBI Chief Clears Air on Retail F&O Trading

Markets regulator SEBI has ruled out the possibility of mandating aptitude tests for retail investors looking to trade in Futures & Options (F&O), with Chairperson Tuhin Kanta Pandey calling such a move both “impractical” and “overreaching”.

Addressing media queries regarding calls from sections of the financial industry for stricter gatekeeping mechanisms for retail derivative trading, Pandey made it clear that the regulator is not inclined toward implementing qualifying exams for individuals seeking access to the high-risk segment.

“At this stage, we are not contemplating anything along those lines,” Pandey said, noting the logistical and philosophical challenges that such a measure would entail. “We must ask ourselves—would that be regulatory overreach? And how would it even be implemented effectively?”

The remarks come in the backdrop of SEBI’s November 2023 study, which found that nearly 90% of individual traders in the F&O market incur losses, prompting concerns over speculative excess and calls for tighter regulation.

While SEBI already requires certifications such as the NISM (National Institute of Securities Markets) credentials for professionals like investment advisers and research analysts, Pandey emphasized that extending similar requirements to the millions of retail traders would be a vastly different proposition.

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“If we start implementing aptitude tests for every financial product, the question becomes—where do we draw the line? Should there also be a test before investing in mutual funds?” he asked, underscoring the importance of maintaining a pragmatic approach.

The SEBI chair also highlighted the fundamental principle of financial autonomy, suggesting that individuals should retain the freedom to manage their own money, even if that involves high-risk decisions.

“People must have the choice to use their money as they see fit. It’s part of financial democracy,” he said. However, he reiterated SEBI’s cautious stance on leveraged trading, warning of its inherent risks. “We strongly discourage leverage in trading. In India, leveraged buyouts aren't permitted. Even in the AIF (Alternative Investment Funds) space, high leverage is not allowed.”

Pandey acknowledged the psychological dynamics of trading, drawing a parallel between the compulsive nature of speculative activity and behavioral addictions. “Much like the health warnings on cigarette packs, we can issue disclaimers. But people still smoke. Similarly, if someone treats trading like an addiction, it moves beyond regulation and enters the domain of behavioral intervention,” he said.

While calling for awareness around financial risk, Pandey maintained that SEBI’s job is to empower rather than restrict. “Many investors learn through experience. They may lose initially, but over time they gain knowledge and improve as market participants,” he noted.

In essence, while SEBI continues to monitor retail activity in derivative markets and has taken steps to improve transparency and reduce misuse, it remains wary of paternalistic interventions that may infringe on personal financial freedoms.