What Are Structured Products and Why Do They Matter?
The Rs 35,000 crore structured product market in India, a fast-growing segment catering primarily to high-net-worth individuals (HNIs), is staring at a potential disruption. Structured products are sophisticated investment instruments that combine elements of debt and equity, often with embedded derivatives. Their appeal lies in offering customized market-linked returns in a low-yield environment — typically with minimum investments of Rs 1 crore.
These products rely heavily on derivative positions, particularly index futures and options, to hedge exposure. Any regulatory limit on such positions could not only derail their risk management strategies but also send ripple effects through broader market liquidity and volatility dynamics.
SEBI’s Proposal and the Industry’s Growing Concern
The Securities and Exchange Board of India (SEBI) is preparing to release a circular introducing new limits on positions held in index derivatives. While aimed at curbing excessive speculation and market manipulation, the proposed norms may inadvertently impact structured product issuers — forcing them to unwind positions rapidly and potentially disrupting market stability.
Industry insiders have made representations to SEBI, urging that structured products be exempted from the long delta end-of-day position limits. They argue that structured products serve a different purpose — largely hedging obligations tied to benchmark-linked returns, not speculative gains. Therefore, applying the same rules designed for traders and speculators could impair legitimate risk management.
Structured product issuers typically buy when markets are weak and sell into strength, playing a countercyclical role. This behavior provides a natural stabilizing force, especially during volatile sessions. According to sources, issuers have pointed to SEBI’s own 2020 circular, which allowed unlimited hedging positions under specific circumstances, as a precedent for more flexible treatment.
Exchanges have already begun collecting data from issuers to assess the real-world impact. The industry is also advocating for structured products to be categorized separately, allowing differentiated treatment for hedging versus speculative activity.
The expected regulatory thresholds include gross position limits of Rs 10,000 crore and end-of-day limits of Rs 1,500 crore (on a futures-equivalent open interest basis). Though more lenient than previous drafts, these limits may still cramp the style of structured issuers. Additionally, brokers could face a cap of 15% of open interest or Rs 7,500 crore, whichever is higher. While these limits reflect SEBI’s responsiveness, clarity on structured product exemption remains elusive.
Pros and Cons of the Regulatory Push
Pros:
· Market Discipline: New limits could reduce unchecked speculative exposure and reduce systemic risk.
· Transparency: Mandatory disclosures and data collection increase accountability and oversight.
· Investor Protection: Reducing over-leveraged positions can shield retail investors from hidden volatility.
Cons:
· Risk to Hedging Efficiency: Structured product issuers may face mismatches in liabilities if unable to fully hedge.
· Liquidity Stress: Forced unwinding could strain markets, especially during low-volume periods.
· Growth Headwinds: Regulatory overreach may slow down an industry that’s growing Rs 6,000–7,000 crore annually.
Balancing Control with Innovation
As India’s financial markets evolve, so too must its regulatory frameworks. SEBI’s intent to curb speculative excess and protect market integrity is understandable. But structured products — by design — are tools of precision, not speculation. Treating them like leveraged trading bets risks undermining innovation in wealth management.
The upcoming circular could determine whether India fosters a healthy structured product ecosystem or stifles it under a one-size-fits-all regime. In the end, the right balance must be struck — one that safeguards market stability without punishing responsible financial engineering.
(With agency inputs)
