MUMBAI: SEBI has stopped the country’s two newest exchanges from offering trading in equity derivatives and has asked them to build up their share-trading businesses first, two regulatory sources said.
Late last year, the National Commodity & Derivatives Exchange (NCDEX) and the Metropolitan Stock Exchange (MSE) sought approval from the SEBI to launch and develop equity cash and derivative products, according to exchange disclosures, Reuters reported.
NCDEX predominantly trades agricultural commodities, while MSE mainly offers currency derivatives and has very thin equity volumes. Both exchanges have been looking to diversify their businesses.
SEBI’s decision underscores continued caution over India’s soaring equity derivatives market, where premiums are now roughly twice the size of the cash market, compared with 2 per cent to 3 per cent in major global economies. The regulator’s directive to the exchanges telling them to pause plans for derivatives products has not been previously reported.
Despite steps taken to cool derivative trading, India’s NSE remains the most active derivatives exchange, accounting for more than 70 per cent of index options contracts traded worldwide, data from World Federation of Exchanges showed.
Earlier this month, the government raised transaction taxes to help cool derivative trading volumes. Studies have shown that 90 per cent of retail investors incur losses.
“SEBI wants there to be a gap of at least six months between the launch of cash equities and equity derivatives,” the first source said. “Exchanges won’t be granted permission to launch derivatives until SEBI is satisfied that there is an underlying liquid cash market.”
SEBI does not want new players to further fuel derivatives trading without first establishing an underlying cash market, the source said.