Rapid rise in derivative trading in India could pose several challenges, says cenbank report

MUMBAI (Reuters) - A rapid rise in derivative trading volumes in India could pose several challenges, a central bank report said on Thursday, adding to warnings of the financial stability risks that could emerge from a surge in retail participation in the country's futures and options market.

Retail investors could be exposed to sudden movements in markets without proper risk management if they have large exposure to derivatives, the Reserve Bank of India said in the Financial Stability Report, which is a collective assessment of India's Financial Stability and Development Council and includes contributions from all key regulators.

"Since derivatives are more complex than the underlying, investor protection is a key regulatory imperative," the report said.

The comments follow a warning from India's federal Finance Minister Nirmala Sitharaman, who said last month that an unchecked explosion in retail trading of futures and options can create future challenges not just for the markets, but also for investor sentiment and household finances.

Markets regulator the Securities and Exchange Board of India (SEBI) is mulling several changes to its derivative trading rules, Reuters reported earlier this month.

SEBI has set up a committee to review the futures and options market from both an investor protection and overall systemic risk management perspective, the report said.

In particular, the surge in shorter-duration options could lead to more volatility in the stock market, the report said.

"The preference among investors to reduce holding period and shift from one instrument to another searching for immediate expiries could intensify volatility," it said.

(Reporting by Ira Dugal; Editing by Mrigank Dhaniwala)