Exclusive: India regulator seeks curbs to limit retail investors' derivatives risk

MUMBAI, July 28 (Reuters) - Indias market regulator, seeking to reduce risks for retail investors, will propose linking the amount of equity derivatives they may trade to their wealth, two people with direct knowledge of the matter said.

With Indian share prices near record highs, drawing increased retail investor interest, the regulator is concerned smaller players could suffer losses on derivatives if markets turn volatile.

Retail investor participation in the equity derivatives market jumped 500% in the three years through March, according to data from the Securities and Exchange Board of India (SEBI). Nine in 10 individual traders, dominated by people in their 30s, lost money in the previous fiscal year, with average losses averaging 110,000 Indian rupees ($1,300), a SEBI study found in January.

SEBI has previously asked brokers to discloses risks associated while trading in derivatives prominently on their websites but is now considering stricter measures.

The regulator is discussing measures to track and control \“disproportionate trading\” to safeguard retail investors by linking the value of trades in futures and options to the their income and net worth, the sources said.

They asked not to be identified as they are not authorised to speak to the media.

SEBI did not respond to an email requesting comment.

\“SEBI is examining whether stock brokers can be made responsible for reporting net worth and income of individual traders to exchanges,\” one source said. Determinations would be based on information disclosed in tax returns.

Once a broker discloses an investors net worth and income, exchanges could monitor the persons exposure to futures and options contracts across brokerage firms, the other source said.

Trading would be capped at a threshold that the first source said would be a multiple of net worth.

A discussion paper, the first step toward crafting regulations, will be issued soon, the sources said.

SEBI had proposed a similar framework in 2017 but dropped the idea when brokers cited difficulties in assessing the net worth of their clients. The regulator revived the idea of curbs because of the study showing widespread losses on equity derivatives trades, the sources said.

Norms for product suitability are common in many markets, mostly applying \“to high-risk investments such as venture funds, hedge funds, commodity and equity derivatives\”, the first source said.

South Koreas financial markets regulator in 2011 introduced entry barriers for retail investors to trade in equity derivatives, including a minimum deposit and compulsory training. It eased those restrictions in 2019.

The number of derivatives contracts traded in India stood at 5.56 billion as of June, the latest data available shows. Options trading accounts for 98% of the derivatives contracts.

($1 = 82.2900 Indian rupees)