The Securities and Exchange Board of India (SEBI) has received a set of recommendations from an expert working committee aimed at curbing speculative trading in derivatives.

This committee, appointed by SEBI last month, was tasked with addressing the surge in retail participation and the resulting excessive speculation in recent years.

The Working Committee on Futures and Options has put forth several key measures.

The most significant recommendations include increasing the minimum lot size of derivative contracts from the current Rs 5 lakh to a range of Rs 20 lakh to Rs 30 lakh.

Additionally, the committee suggests restricting weekly options to only one expiry per stock exchange per week and limiting the number of strike prices available for options contracts.

These measures are designed to control the rapid rise in derivatives volume, sources revealed to us.

Among the proposals, two stand out for their potential to significantly impact trading volumes.

First, the substantial increase in contract size is likely to make derivatives trading unaffordable for small-ticket traders.

Second, limiting the number of weekly expiries will reduce the frequency of trading opportunities, thereby narrowing the playing field for traders.

The committee has also proposed other measures, including reducing the number of strike prices, requiring upfront collection of option premiums from buyers, implementing intra-day monitoring of position limits, and increasing margin requirements as expiry dates approach.

These recommendations will be reviewed by the Secondary Market Advisory Committee before a final decision is made.

The sharp rise in derivatives volume in India has been a growing concern.

While SEBI Chairperson Madhabi Puri Buch recently stated that the increase does not pose a systemic risk due to the robust margining system in place, the social repercussions of such speculative trading cannot be ignored. Anecdotal evidence suggests that many individuals are borrowing money to trade options, driven by the hope of quick profits.

This is particularly troubling given SEBI's study indicating that nearly 90% of retail traders lose money on options bets.

Market experts argue that most weekly contracts serve no economic purpose and are used primarily for speculation rather than hedging, which is their intended use.

SEBI Chairperson Madhabi Puri Buch affirmed the regulator's willingness to take any derivative products off the market if recommended by the working committee. "We are entirely data-driven.

If that's what needs to be done, and that's what the committee recommends, and we agree with the logic, we will do it," she stated during a press conference after the SEBI Board Meeting on June 28.

SEBI data highlights the dramatic increase in derivative turnover, which has surged from Rs 210 trillion in FY18 to Rs 500 trillion in FY24.

The Futures and Options (F&O) segment has seen growing participation from retail investors, with numbers rising by over 40% from 65 lakh in FY23 to 96 lakh in FY24.

The proportion of individual investors in index options has also jumped from 2% in FY18 to 41% in FY24.