SEBI Proposes Measures to Curb F&O Trading; Will it Impact Traders?

India’s share market regulator SEBI released a consultation paper on Tuesday, 30 July 2024. It suggests measures to strengthen the index derivatives framework for investor protection and market stability. 

These proposals are made due to increased retail participation, offering short-tenure index options contracts, and heightened speculative trading volumes in index derivatives on expiry days. 

Also Read | SEBI Revises Eligibility Criteria for Derivatives Market Stocks

SEBI: Upfront Collection of Options Premium

Sebi has proposed that members collect option premiums from clients upfront. At present, there is a stipulation for upfront collection of margin for futures long and short positions as well as on options short positions. There is no explicit stipulation of upfront collection of options premiums from options buyers by members.

Changes in Contract Size

Sebi has proposed increasing the minimum contract size for index derivatives such as Nifty and Sensex to up to Rs 30 lakh from the existing Rs 5-10 lakh. This will be done in a phased manner, starting with Rs 15 lakh to Rs 20 lakh and, after six months, Rs 20 lakh to Rs 30 lakh.

Weekly Options for Benchmark Indices

SEBI said weekly options contracts will be allowed for only one exchange benchmark index. The benchmark index for BSE is Sensex, and for NSE, it is Nifty50.

At present, there are weekly derivative contracts for benchmark indices and bank indexes. The NSE launched weekly derivatives contracts on the benchmark index in February 2019, shifting trading activity towards index options contracts.

Option Strike Price 

The SEBI has also proposed rationalising the existing strike price introduction methodology. Strike interval to be uniform up to a fixed percentage coverage near prevailing index price 4% around prevailing index price, it said. Further, up to 50 strikes to be introduced for an index derivatives contract at the time of launch.

Removal of Calendar Spread Benefit on Expiry

In existing practice, the calendar spread margin applies on expiry day for two Futures and Options positions with different expiries as against two normal F&O positions. This helps in significantly reducing margin requirements. 

SEBI proposed that no calendar spread margin benefits will be provided for contracts expiring on the same day.

Intraday Monitoring of Position Limits

Sebi proposed that clearing corporations should monitor the position limits for index derivative contracts on an intraday basis, with an appropriate short-term fix and a glide path for full implementation, given the need for corresponding technology changes. 

Increase in Margin Near contract expiry

To address the issue of high leverage in options contracts near expiry, which creates a high risk on a notional basis for entities dealing in options, the margins on expiry day and the day before expiry are proposed to be increased. 

At the start of the day before expiry, ELM is proposed to be increased by 3% while at the start of expiry day, ELM is proposed to be further increased by 5%.

SEBI Invited Public Comments

After the release of this Consultation paper, Sebi has invited public comments and suggestions from other interested stakeholders along with support rationale through its web-based portal or alternatively via email latest by 20 August, 2024.

Also Read | SEBI Issues New Guidelines for Stock Exchanges and Market Infrastructure Institutions