Derivative exposure based on Income tax returns for retail traders - Outcome from latest SEBI board meeting


My personal view on this.
*Data and material is collected from various sources.

Before commenting on actions of SEBI I believe first we should know the reasons that prompted SEBI to consider these kind of formidable changes to F&O market.

According to finance ministry data, equity derivative markets are growing disproportionately compared to equity cash market, in 2017 F&O turnover was 18 times that of cash market turnover compared to 9 times in 2011 and 3 times in 2009.Alarmingly this growth is witnessed with decrease in number of derivative investors to 5.7 lakhs in 2017 compared to 10.6 lakh investors in 2010.
India ranks second in the world only next to Korea in terms of ratio of derivative turnover to cash turnover. Also according to global standards percentage of non-institutional trades in derivatives accounts for more than 58% which is considered as quite high. Individual investors contribute to almost 1/4th to the total volume of equity derivative trades in India and some percentage of this never traded in cash market. Retail investors in India bet on a notional value of $800 billion of stock futures in 2016, more than the value of stock futures traded in all of Europe, Hong Kong and Singapore combined.

Definitely this data suggests growth in derivative markets in India is mainly driven by speculation and is not sustainable.Also after analyzing this data finance ministry has a reason to concern and wants
SEBI to contain this alarming growth of derivatives compared to equities and want to implement measures that boosts growth of cash markets.

In order to attain sustainable growth,to rationalise, reduce speculation by retailers and to increase their participation as a whole in F&O SEBI is mulling various options.

  1. Considering to increase minimum contract size to 10 lakhs from current 5 lakhs, but this is mostly ruled out as there was no effect intially when contract size was increased to 5 lakhs from 2 lakhs and currently there are handful of stocks whose contract size is already much above than 10 lakhs. Also this implementation can lead to rise of dabba trading again in India where one can bet without paying any taxes in multiple small lots.

  2. Recently SEBI notified the revised framework for stock derivatives trading under which the stocks that fails to meet the enhanced eligibility criteria will be moved from cash settlement to physical settlement. The move is part of Sebi’s broader plan to completely move towards the physical settlement of stock derivative contracts, which according to it is necessary to curb high amount of speculation in the markets. No doubt, this move will filter out companies with lower trading interest from the F&O segment but few believe in first place stringent criteria should be there for any stock to be allowed to trade in F&O.It is also necessary for the regulators to strengthen the support systems before announcing such measures. Physical settlement is mandatory in several global markets. However, all these markets have strong stock lending and borrowing (SLB) mechanism through which investors borrow stocks at a marginal cost. However, SLB in India is still evolving, leaving little choice for derivatives investors who take short positions.

  3. Another proposal from SEBI is to alienate retail investors from F&O is restriction on trade in cash and derivatives based on their disclosed income according to their income tax return over a period of time. For exposure beyond the computed exposure, the intermediary would be required to undertake rigorous due diligence and take appropriate documentation from the investor,which is highly impractical for brokers to implement this. Also client can give same ITR to multiple brokers and trade with additional exposure than permissible limit, one wonder how this can be kept under check? What if one inherited capital and want to trade with that? so, there are many questions unanswered with this proposal.

  4. Also SEBI is considering to introduce concept of product suitability for investors in India as prevalent in other advanced markets. The main motive of this would be “Any product sold to investor should be suitable to him”. Not sure how this will evolve considering various parties involvement,customized needs, individual risk preferences, eligibility and different financial capabilities.

  5. Few experts also suggest so as to curb speculation by retailers regulators should address lower taxes on options.As Securities Transaction Tax (STT) on options trades is levied on the premium amount only while it is levied on the full value in cash market trades.

  6. Few suggest that SEBI should consider relevant education as prior eligibility for investors to trade in F&O, in this way they are fully aware of risks involved upfront.

  7. The other focus of SEBI was on algorithmic trading framework and the regulator decided to streamline the segment, it allowed for members to operate from the co-location facility (as this would reduce costs),provided for dissemination of tick-by-tick data to all trading members; tightened the criteria under the order-to-trade-ratio which will now apply a penalty for orders at plus/minus 0.75% of the last traded prices, against plus/minus 1% earlier and extended its applicability to the cash segment; called for a unique identifier for each algorithm; enhanced disclosures on latency by exchanges.

  8. The regulator also made norms more stringent for errant listed companies and allowed stock exchanges to impose fines for non-compliance with the new rules. It also empowered the stock exchanges to freeze shareholdings of promoters in non-compliant entities (as well as their holding in other securities) and to suspend their listing.

Considering the motives of SEBI one should appreciate it but too many regulations within short period of time may play spoilsport, kill liquidity and shatter derivative markets resulting in rise of parallel markets such as dabba trading.


@siva i never appreciate SEBI, instead of progressing SEBI is going backward , but as you noticed , that things surely happen , remember the days of restrictions on Gold , finally Govt realized the issue and modified it. Now the Finance ministry is begging people to buy Govt supported Gold Bonds. For every thing related to stock market SEBI is giving an example of American market , but the same SEBI board not able/failed to learn simple thing from them , at least SEBI should learn from Chinese examples.


Ill-conceived decision like point number 3 will encourage dabba trading more than anything else.


True. Agreed


Yes retail pplz not makin any money anyway, it will only discourage pplz mindset to not get involved in markets, very bad decission indeed…


All sign petition not to change anything ,all brojerage houses unite go go go


@nithin @siva Will trading in MCX also be affected ? If i don’t have any income then won’t I be allowed to trade in MCX as well? :frowning:


Let SEBI implement this first and give us guidelines then we can conclude on this, till then can stop worrying.


Test will be online or on paper


Received this circular from sebi… if this circular is related to the topic being discussed in the thread …where is sebi wanting the linking of ITR for derivatives trading?

SEBI/HO/MRD/DRMNP/CIR/P/2018/75 May 02, 2018
All recognized Stock Exchanges (except Commodity Derivatives
Exchanges) and recognized Clearing Corporations, including those
Dear Sir/Madam
Additional Risk management measures for derivatives segment
Based on the feedback received from the Clearing Corporations and the
recommendations of the Risk Management Review Committee (RMRC) of SEBI, the
following additional risk management measures are required to be complied with and
implemented by the stock exchanges/clearing corporations for derivatives segment.
Margin Collection Requirement
2. For the Equity Derivatives segment, the client margins which are required to be
compulsorily collected and reported to the Exchange/Clearing Corporation, as the
case may be, by the Clearing members / Trading members shall include initial
margin, exposure margin/extreme loss margin, calendar spread margin and mark to
market settlements.
Margin Enforcement Requirement
3. With reference to SEBI circular CIR/DNPD/7/2011 dated August 10, 2011 captioned
“Short-collection/Non-collection of client margins (Derivatives segments)”, it is
clarified that the ‘margins’, for both Equity Derivatives Segment and Currency
Derivatives Segment, shall include margins as specified in Para 2 of this circular,
mark to market settlements or any other margin as prescribed by the
Exchange/Clearing Corporation to be collected by Clearing Members from their
clients (i.e. Custodial Participants and Trading Members - for their proprietary
positions) and by Trading Members from their clients.

Computation of Liquid Net worth
4. Further to SEBI circular IES/DC/Cir-4-99 dated 28th July, 1999, it is clarified that for
the equity derivatives segment, the liquid net worth shall be arrived at by deducting
initial margin and the exposure margin/extreme loss margin from the liquid assets of
the clearing member.
5. The provisions of this circular shall come into effect from June 01, 2018.
6. Stock Exchanges and Clearing corporations are directed to:
a) take necessary steps to put in place systems for implementation of the circular,
including necessary amendments to the relevant bye-laws, rules and
b) bring the provisions of this circular to the notice of their members and also
disseminate the same on their websites; and
c) communicate to SEBI, the status of implementation of the provisions of this
circular in the Monthly Report.
7. This circular is being issued in exercise of powers conferred under Section 11 (1) of
the Securities and Exchange Board of India Act, 1992 to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market.
Yours faithfully
(Bithin Mahanta)
Deputy General Manager
Market Regulation Department


This is not related to the derivative exposure topic. Read below



Is there any update on this decision by SEBI?


Let’s hope something comes out today as the Broker’s Body has a meeting scheduled with Sebi today…


How do you know this?


Hello nitin does that mean, no job no trade bexause no tax, what about pplz doing this as a business


@nithin I find a big opportunity here for strategy based contracts which runs on upfront information of loss and profit out of that trade to a trader.


The issue with strategy based contracts will be liquidity. I have already made a representation on this. If the spreads itself trade, there will be no execution risk, the margins required to trade them also can drop significantly.


Yes . Margins will be dropped and small rather manual traders would be able to execute the trades without slippages


Will this have effect on traders who trade in MCX as well?