Financial market regulator Securities and Exchange Board of India (SEBI) has proposed updating the framework for trading in stock derivatives. Floating a consultation paper on its website, the regulator said there can be higher risks of market manipulation, increased volatility, and compromised investor protection.

The consultation paper seeks view from all stakeholders on updating the selection criteria for entry and exit of stocks in the derivatives market. Derivatives trading typically help one make profits by betting on the future value of an underlying asset. Trading in derivatives by small retail investors, particularly in futures and options (F&O) segment, has risen in India over the past years.

Exchanges and the regulator have from time to time cautioned investors on the potential risks that arise from such high risk investments. The discussion paper floated by SEBI now said derivatives contracts on individual stock should have sufficient liquidity and should elicit sufficient trading interest from diverse market participants.

Currently, it is applicable only in index derivatives. "Without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection.

Given all this, there is a need for SEBI to ensure that only high-quality stocks in terms of size, liquidity, and market depth are available in the derivatives segment," SEBI said. The market regulator also argued that stocks that have low derivative turnover, low open interest (volumes), and narrower participation in the derivatives segment are vulnerable to manipulation, thereby exposing investors to more risk.

Under the proposed rules, the regulator now says that for a stock to be considered for futures and options (F&O) trading, it should have traded for 75 per cent of trading days. At least 15 per cent of trading members active in all stock derivatives or 200 members, whichever is lower, shall have traded in any derivative contract on the stock; average premium daily turnover should be minimum ₹150 crore; average daily turnover must be between ₹500 crore and ₹1,500 crore; are some among new SEBI proposals.

Public comments are invited on the proposal till June 19, 2024.