Derivatives trading may need more guardrails, says Sebi's KVR Murty

The Securities and Exchange Board of India (Sebi) may consider additional safeguards for derivatives trading amid heightened activity on expiry days, while leaving open whether the responsibility for guiding investors should rest with the regulator or brokers, KVR Murty, whole-time member of Sebi, said at the Business Standard BFSI Summit in Mumbai on Tuesday.

“Some guardrails may be required, and people may need more guidance given the kind of activity that we have seen, particularly the heightened activity on expiry days,” Murty said during a fireside chat with Business Standard's Khushboo Tiwari on regulation, innovation and technology.

“It is too early to say whether Sebi or brokers should take that role. Ultimately, investor interests and market integrity come first and last,” he added.

Murty said Sebi’s role was to make investors aware of the risks associated with market products rather than prevent them from investing in particular segments. The regulator’s studies on derivatives were intended to put the risks in the public domain and help investors make informed decisions.

“We do not want excessive regulation, nor do we want under-regulation. We aim for optimum regulation,” he said, adding that the regulator wanted markets to function transparently while protecting investors’ interests.

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AI in surveillance, quantum risk guidelines

Murty said Sebi had developed in-house artificial intelligence (AI) tools to strengthen market surveillance and improve the efficiency of its regulatory functions. The regulator monitors market activity on a near-real-time basis, he said, adding that its capabilities had helped it intervene through interim orders and other enforcement actions.

Asked whether human oversight would remain part of AI-led surveillance, he said it would be central to the regulator’s approach.

“At Sebi, we believe that a human in the loop will be a defining aspect of how we perform our regulatory functions,” he said.

On quantum computing and the risks it could pose to the cryptographic systems underpinning financial market infrastructure, Murty said Sebi was working with market participants and overseas regulators to strengthen preparedness.

CAS changes reflect need to adapt

On the closing auction session (CAS), which drew more than 20,000 responses during Sebi’s consultation process, Murty said the experience underlined the need for regulators to remain open to feedback and adapt their frameworks.

Sebi modified its original proposal after the first round of consultation and held another round before finalising the framework. The process showed that market structures could not be governed by a uniform template, he said.

“Markets evolve through experience, and regulators must learn and adapt to each market. There is no one-size-fits-all approach, and there is no universally followed CAS template around the world,” Murty said.

He added that Sebi had considered feedback from brokers and other stakeholders, including those directly affected by the changes.

“There was appreciation, but also criticism, which we accepted honestly and in the right spirit. This is how regulation evolves. We study data, take feedback, consult stakeholders and adapt,” he said.

Minor violations need not invite severe punishment

“Minor transgressions that do not cause large-scale investor losses or compromise market integrity are not punished severely,” he said, pointing to the regulator’s advisory and settlement mechanisms.

“We do not call a foul at every ball. We also issue advisories and warnings. The response is graded according to the extent of the harm caused,” he added.

Murty also called for closer coordination between Sebi, the National Financial Reporting Authority (NFRA) and stock exchanges to improve the quality of financial reporting by listed companies.

He said exchanges were the first line of defence and needed to examine financial reporting alongside corporate actions and trading activity. Regular collaboration among the three institutions was essential, he added.

Sebi's priorities

Looking ahead, Murty said Sebi was reviewing its Listing Obligations and Disclosure Requirements (LODR) and Issue of Capital and Disclosure Requirements (ICDR) regulations, while examining the framework for small and medium enterprises (SMEs).

Other priorities include deepening the bond market, expanding the securities lending and borrowing mechanism (SLBM), reviewing the short-selling framework and simplifying know-your-customer (KYC), onboarding and registration requirements.

The regulator is also working to deepen the cash market and make it a more representative reflection of investors’ financial assets.

On corporate governance, Murty said Sebi wanted companies to strengthen their boards and increase the participation of independent directors and audit committees.