The Securities and Exchange Board of India (SEBI) has unveiled a set of proposals aimed at tightening the framework for index derivatives (futures and options) to bolster investor protection and market stability. On July 30, SEBI released a consultation paper detailing these seven measures, aimed at enhancing the regulatory landscape for derivatives trading.
Objective of SEBI’s Proposals
The primary goal of these measures is to protect investors and promote market stability while ensuring sustained capital formation in the derivatives markets. Here’s an in-depth look at SEBI’s proposed changes, their potential impact on F&O traders, and expert opinions on the matter.
Seven Key Proposals in SEBI’s F&O Consultation Paper
- Rationalization of Strike Price for Options
- Current Practice: Nifty and Bank Nifty options strikes cover approximately 7-8% of index movement daily, with additional strikes introduced as needed. Nifty has up to 70 options strikes, while Bank Nifty has around 90.
- Proposed Change: Limit the number of strikes to no more than 50 at contract launch. Strike intervals will be uniform near the prevailing price (around 4%) and may extend to 8% if necessary.
- Upfront Collection of Options Premium
- Current Practice: Margin is collected for futures positions on both the long and sell side and for short positions in options, but not for upfront collection of options premium from buyers.
- Proposed Change: Collect options premiums on an upfront basis.
- Removal of Calendar Spread Benefit on Expiry Day
- Current Practice: Calendar spread margin applies on expiry day for two F&O positions with different expiries, significantly reducing margin requirements.
- Proposed Change: Eliminate calendar spread margin for contracts expiring on the same day.
- Intraday Monitoring of Position Limits
- Current Practice: Position limits are monitored at the end of the day by MIIs (Clearing Corporations/Stock Exchanges).
- Proposed Change: Monitor position limits for index derivatives on an intraday basis, with an appropriate short-term fix and a phased implementation plan.
- Minimum Contract Size
- Current Practice: The minimum contract size requirement of Rs 5 – Rs 10 lakh was set in 2015.
- Proposed Change: In Phase 1, set the minimum contract size between Rs 15 – Rs 20 lakh at contract introduction. In Phase 2, after six months, implement a minimum contract size of Rs 20 – Rs 30 lakh.
- Rationalization of Weekly Index Products
- Current Practice: Weekly expiry of index derivatives results in one expiry every day of the week across indices/exchanges.
- Proposed Change: Limit weekly expiry to one benchmark index per exchange.
- Increase in Margin Near Contract Expiry
- Current Practice: No additional margin is required in the last two trading days of the expiry.
- Proposed Change: Collect an additional 3% Extreme Loss Margin (ELM) at the start of the penultimate day of contract expiry, increasing to 5% on the last day.
Rationale Behind SEBI’s Proposals
SEBI Chief Madhabi Puri Buch emphasized the need to address the annual loss of Rs 50,000 – Rs 60,000 crore in household savings through derivatives trading. SEBI believes that excessive speculative trading in F&O markets is a macro concern, with retail investors accounting for around 50% of trading volumes. In FY24 alone, 9.25 million unique individuals and proprietorship traders incurred cumulative trading losses of Rs 51,689 crore in index derivatives on the NSE.
Next Steps
SEBI has invited public comments and suggestions on these proposals until August 20, 2024, through its web-based portal or via email.
Expert Opinions
Dhiraj Relli, MD & CEO of HDFC Securities, believes these measures are intended to curb exuberance in equity derivatives trading. He noted that rationalizing weekly expiry to one per week on the benchmark index per exchange could impact trading volumes, as current volumes are driven by weekly expiries. Relli also anticipates further regulatory interventions, including product suitability and customer-level certification, which could lead to a rationalization in equity derivatives volumes.
Jefferies, a foreign investment firm, predicts that SEBI’s proposals could have a divergent impact on market players, with exchanges and retail-focused brokers being most affected.
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