Derivatives trading to get tougher

BS Reporter / Mumbai April 1, 2008

Investors may be required to have a certain minimum amount of net worth for trading in the derivatives segment, according to the Securities and Exchange Board of India’s (Sebi) proposed policy for improvement in the sales practice of members of stock exchanges.

A net worth certificate from a practising chartered accountant or acknowledgement for income tax return filed would be accepted in this regard, said the draft proposal.

“This is a good proposal because only those who can afford will be allowed to trade in the F&O segment. Earlier, people were playing beyond their means as people were using the derivatives segment more for speculation rather than hedging,” said Ambareesh Baliga,

There is a tendency to overtrade in the F&O segment. While trading volumes in this segment will be hit in the short run, in the long run this is healthy for the market,” said Anita Gandhi, institutional head, Arihant Capital Markets.

Currently, there is a net worth requirement of Rs 3 crore for clearing members, who are permitted to settle their own trades and trades of other non-clearing members known as trading members, who have agreed to settle trades through them.

They are also required to furnish an auditor’s certificate for the net worth every 6 months to the exchange. For a self-clearing member, members who clear and settle their own trades only, the minimum net worth requirement is Rs 1 crore, according to the Sebi website.

While there is an option on the net worth requirement of individual clients, this is not strictly enforced, pointed out dealers.

The proposals further say that the exposure/turnover limit given by trading members should be commensurate with the financial details of the clients reported in the Know Your Client (KYC).

“In the short term, volumes will be hit, but in the long run, this will be healthy for the market. In fact, even when the F&O segment was introduced in 2001, clients had to pay an upfront margin at the time when there was no culture or concept of margin. Initially, there was some kind of furore, but soon the practice of margin payment was also introduced in the cash market segment,” said the derivatives head of a local broking house, who did not wish to be identified.

The proposals have made the rules for trading members with regard to disclosure more stringent as brokers now have to inform the client at the time of entering into the member-client agreement about work history and background of the firm, actions against the trading member for non-compliance/breach of regulatory requirements, investor grievances and arbitration cases filed and pending.

“Trading members shall not recommend to their clients securities or derivatives contracts on such securities in a concentrated manner, which represent a subjective or arbitrary supply of information,” said the Sebi proposals.

The regulator has also come down on practices such as front-running, fictitious accounts, unauthorised transactions and misuse of customers’ funds or securities.

“Trading members shall not encourage or induce excessive trading or speculative activity in a client’s account, which is not in accordance with the objectives, risk appetite and financial situation of the client involved,” said the proposal.