Financial regulation in India is far better than it gets credit for

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₹50-60,000 crore, a tiny fraction of India’s overall market capitalization. Further, F&O positions are skewed towards options in India. Globally, option volumes are around the same level as futures, but in India, options are 50-100 times futures.

Why is this important? Because option contracts represent far lower risk of systemic liquidation than futures. Further, thanks to large margin requirements of brokers, a significant proportion of F&O volumes in India are intra-day strategies that get squared up before market close and don’t constitute overnight systemic risk. Low leverage moderates volatility spikes during periods of market stress and cushions investors from panic decisions.

Overall, India’s capital markets regulation has been a great case study. However, as our markets and investors mature, regulation needs to be further finessed. Enhanced market volatility is not a systemic risk unless there is risk of institutional failures arising out of it.

If an investor is investing in options or a small-cap stock, she has the individual agency to do so. The question is whether she has all relevant information while making that decision. Investors need to be armed with information and disclosures, not protected from volatility.

Risks emerge from liquidity, often ahead of even fundamentals. The global financial crisis (GFC) in 2008 was an example, when even fundamentally sound assets had gap downs. Sebi’s new liquidity stress test guidelines for MFs is a start.

But it needs significant work for systemic-risk objectives to be met. Extrapolating near-term liquidity into the future is fraught with risk, especially in small and mid-cap (SMID) stocks. It has repeatedly been seen in market downturns that liquidity dries up at