Regulatory framework
In this chapter: SEBI regulations on derivatives · Code of conduct, investor protection
SEBI (Stock Brokers and Sub-brokers) Regulations and the SEBI (Prevention of Fraudulent and Unfair Trade Practices) Regulations apply to derivatives. Specific derivative-segment rules cover eligibility for stocks (liquidity, market cap, daily turnover), eligibility for clients (suitability assessment for retail), and reporting of derivatives losses for tax (mandatory in ITR for traders).
Stock eligibility for F&O: SEBI sets liquidity, market-cap, and turnover thresholds. Stocks are added/removed from the F&O list based on a six-monthly review. Insider trading rules (PIT regulations) apply equally to derivatives — using unpublished price-sensitive information to buy options is the same offence as buying shares. Front-running by dealers is a serious offence — orders for clients must precede orders for self or for other clients in priority. The 2021-22 cases of front-running by HFT dealers led to multi-crore penalties.
A nuanced regulatory area: the "leverage" disclosure obligation. Brokers must clearly inform clients that derivative trading carries leverage and that losses can exceed the initial margin. Many brokers buried this in fine print; SEBI in 2024-25 mandated explicit, understandable disclosure on every derivatives onboarding. For dealers, recommending derivatives to retail without documented suitability is a violation. The exam tests these scenarios in the form of "What should the dealer do when client X asks for Y?" multi-step MCQs.