Sebi clamps down on derivative markets; algo trading made more accessible

Sebi clamps down on derivative markets; algo trading made more accessible

New Delhi, Mar 29: The Securities and Exchange Board of India (Sebi) tightened the derivative markets framework to curb the excessive speculation and prevent small investors from entering the high-risk space. The market regulator, at its board meeting, also accepted majority of the recommendations made by the Uday Kotak Committee on corporate governance but deferred decision on key proposals such as one on sharing of information with promoters.

Sebi announced steps to make algorithm trading more accessible and reduced the cost of buying equity mutual funds. It also proposed to introduce a new compliance framework for stocks undergoing insolvency proceedings and an “entirely new” set of buy-back regulations.
To ensure derivatives and cash market move in sync, Sebi enhanced the eligibility criteria on stocks allowed to trade in this segment. It further said stocks that don’t meet certain criteria will compulsorily have to be physically-settled. Currently all futures and options (F&O) contracts are cash-settled without any physical delivery. Around 209 stocks are currently traded in the F&O segment, which market players said will reduce following Sebi’s latest measures.
Sebi also introduced the concept of ‘product suitability’ under which investors will have to demonstrate income or knowledge proof to deal in the derivatives segment. According to the new framework, individual investors can take free exposure to markets (both cash and derivative) only up to a certain amount which would be decided based on their total disclosed income as per tax filings. In cases investor chooses to take exposure beyond the specified limit, Sebi has directed brokers to undertake rigorous due diligence and collect appropriate documentation.
“There is over speculation in the (derivatives) market. We are better off without it. We don’t want to spoil our market,” said Ajay Tyagi, chairman, Sebi.
Sebi approved 80 recommendations made by Uday Kotak Committee on corporate governance without any modification. Another 15 other were approved with modifications while eight others were referred to other respective agencies.
Some of the key proposals accepted include limiting maximum number of director positions an individual can hold at listed companies, enhanced disclosure of related party transactions (RPTs) and utilization of funds.
Among the suggestions which have been accepted with modifications include split of roles of managing director (MD) and chief executive officer (CEO), mandatory shareholder approval for royalty payments and one woman director in Top 500 companies. However, one of the important recommendation around sharing of price sensitive information with controlling promoters has be shelved.
Sebi has also proposed to reduce the additional expenses that fund houses are allowed to charge of the daily net asset value of schemes. Currently, rules allow MFs to charge additional expense ratio of up to 20 basis points (bps) which was proposed to be reduced to five bps.
Sebi clamps down on derivative markets; algo trading made more accessible Vidya Bala, head-mutual fund research, FundsIndia said that the impact of a cut by 15 basis points for individual investors is likely to be rather limited because returns are significantly higher, especially in equity schemes. However, the move does contribute towards making mutual funds stand out better.