head of the Sebi says the market is aware of "regulatory risk" and is willing to remove derivative products from the market

The extremely speculative character of weekly options trading has been noted by Sebi's Madhabi Puri Buch, who said that the regulator would act on the suggestions of the working group established under the Secondary Market Advisory group.

In a June 27 news conference, Madhabi Puri Buch, the chairperson of Sebi, said, "Wherever there is regulation, there is regulatory risk."

According to the Sebi Chairperson, the market regulator would consider removing derivative goods from circulation if the expert group considering the F&O industry recommends it. She went on to say that the market ecosystem is aware of that regulatory risk.

To a query from Moneycontrol about whether Sebi would consider any measure that would lead to a decline in trade turnover as a retrograde step, the Chairperson of Sebi Madhabi Puri Buch said, "Not at all".

Earlier in the discussion, Buch had addressed the regulator's concerns on the F&O business, including the kind of trading that was seen in the segment, during a news conference that followed the Securities and Exchange Board of India's (Sebi) meeting with its Board.

Buch said that the only reason for Sebi's observation of concentrated trading in weekly options and on expiration day was speculation, not hedging.

She even highlighted anecdotal evidence of individuals losing their homes as a result of this. "The question is what needs to be done for investor protection, especially due to we have heard of people making loans for this speculative activity," she stated.

In this particular situation, Moneycontrol enquired as to whether the regulator would be prepared to shelve derivative products if doing so was encouraging this trading behavior. Buch said that if the evidence and reasoning supported such course of action, there would be no reluctance in doing it.

She said, "If that is whatever is required (taking out products), that is the considered view of the expert committee (that has been formed under the Secondary Market Advisory Committee) and since we agree with the logic, then why not?"

"Yes of course (there will be financial implications)... (but) as you know, in any business model there is regulatory risk," she said when asked about the financial effects on stock exchanges and other capital-market linked organizations. If you ask bankers and pharmaceutical firms what regulatory risk is, they will tell you that it is a fact of business and that investors need to be aware of it."

Buch said that the market ecosystem has reached a "very mature" level of understanding, recognizing the need of accepting such risks.

She gave the example of a well-known broker discussing this and acknowledging that their business model is impacted by regulatory changes.

After the Reserve Bank of India (RBI) specifically prohibited the use of unhedged currency derivatives in April 2024, Nithin Kamath, the founder of Zerodha, tweeted about regulatory risk. He stated: "I have said this before, regulatory risk is by far the biggest risk for stock brokers" .

Buch could have made reference to this incident.

She emphasized further that regulatory risk is a component of business not just in India but globally and that it affects all industries, not just the capital market.

"Wherever there's a regulation, there is regulatory risk," she said.