SEBI has often spoken about protecting retail investors from the perils of derivative speculation, only to make cosmetic changes to the rules. But its rules promote such activity, favouring entrenched interests over those of the retail investor.

SEBI Chairman Ajay Tyagi has called for expert opinion to curb excessive speculation. However, it smacks of double standards to say that retail traders are vulnerable to speculative trading for their lack of knowledge and indulge in it due to greed, when the regulations are skewed in favour of derivative trading. Regulators, without grasping the features of a ‘cash-settled’ derivative system, are promoting it. In a cash-settled system delivery of shares is not required and derivative contracts are settled by paying the difference between the strike price and the value of the underlying security. These instruments are synthetic and have no purpose other than the transfer of cash from one account to another. They can be controlled by moneybags who manipulate the underlying index from one month to another. Nothing real is produced or traded in a cash-settled derivative system. The buyer of a cash settlement index future is not buying an underlying basket of stocks but merely an option to buy at a future date, which he will never do. Hence, the ‘cash settled’ futures transaction implies no ownership obligation.

SEBI should introduce a physical-settlement system in derivatives, if it cares for the interests of retail investors. If speculators artificially increase or suppress derivative prices, the counterparty can ask for delivery. Large players like LIC can participate in derivatives and limit the power of foreign cartels. It will put the equity funding segment, now shrouded in mystery, on the exchange platform. But groups who benefit most from cash settlement are zealously guarding it and pushing market studies favouring it.

Senior Assistant Editor