On November 13, the Securities and Exchange Board of India (SEBI) took a notable step by introducing new rules for stock brokers.
Now, brokers must share a concise set of terms and conditions termed ‘most important terms and conditions’ (MITC).
This move aims to present risk, pricing, and policy details to investors in a straightforward manner. The goal is to enhance understanding through a simplified format. Investors and clients of the broker would need to formally acknowledge these streamlined conditions.
Sebi has instructed the Brokers’ Industry Standards Forum to release comprehensive standards by January 1, 2024, following consultations. In case the forum doesn’t fulfil this directive, the market regulator will independently publish the standards.
SEBI mandates simplified disclosures
Currently, stock brokers are providing mandatory copies of documents covering rights and obligations, risk disclosure, guidance notes, policies, procedures, tariff sheets, and more.
Sebi stated,
“Typically, these documents are voluminous, and investors may lose focus on critical aspects of the relationship with the broker.”
So, the market regulator made a new rule for stock brokers. Now, brokers must give clients an easy-to-understand paper about their service rules.
Also, brokers must get a note from clients saying they got this simple paper. This change is to make things clearer and help investors know the most important terms and conditions of their agreement with brokers.
New rule of most important terms and conditions
According to the regulator’s notice, there’s a plan to start this new rule in stages. Stock brokers are obligated to communicate this information to existing investors by June 1, 2024. For new investors, awareness about the most important terms and conditions is required starting from April 1, 2024.
This idea is a response to investors having problems with brokers about technical issues causing losses.
Brokers at times mention in contracts that they’re not responsible for these problems. This makes things unclear and feels fishy.
This new rule from the regulator is expected to help investors understand their deals with brokers better. It should make things clearer and create a financial world that’s more open and responsible.
If the industry forum encounters difficulties in releasing the standards, either fully or partially, then SEBI can take over and publish the standards.
This ensures that the standards on Most Important Terms and Conditions are established and shared on time. This will help in promoting transparency and clarity in broker-client relationships.
Options trading boom sparks regulatory concerns
On the other hand, a significant surge in stock options trading in India this year has generated excitement among the country’s retail traders. However, regulators are expressing concerns about the potential risks that such speculative enthusiasm could give rise to.
The surge in derivatives trading within the traditionally cautious markets of the country, where certain products like stock futures remain relatively costly, has emerged following alterations to some options contracts by stock exchanges.
These changes aim to enable faster and more cost-effective bets, coinciding with the proliferation of online retail trading platforms.
Data from exchanges reveals that the daily average value of assets supporting these stock options more than doubled from March to October. The value is reaching $4.2 trillion, which has greatly benefited from this increased demand.
The ratio of the notional value of derivatives to cash trading is the highest globally.
The Securities and Exchange Board of India (SEBI) has not intervened to restrict the trading activity thus far. However, it has issued warnings and expressed awareness of the associated risks.
Market analysts are expressing concern about the surge in options activity.
Despite these concerns, both SEBI and the top Indian exchanges, the National Stock Exchange of India Ltd (NSE) and BSE Ltd, did not respond to emails from Reuters.
Ashish Chauhan, the head of the National Stock Exchange of India (NSE), advised investors in a message to avoid engaging in derivative trades. He particularly warned retail investors, due to the substantial risks involved. He encouraged adopting a long-term investment approach instead.
Furthermore, India’s relatively new derivatives markets lack protective measures. Regulators have not yet set any minimum net worth requirements or investor qualifications for individuals engaging in stock options trading.
Additionally, the consistent upward trajectory of the stock markets each year creates conditions conducive to increased risk-taking and a sense of complacency.
