To bolster the framework of index derivatives and promote market transparency, the Securities and Exchange Board of India (SEBI) has introduced several key reforms, effective from November 20, 2024. These steps are designed to curtail speculative trading activity in the derivatives space while safeguarding investors’ interests.
Significant Changes to F&O Regulations
1. Weekly Expiry Limit
SEBI now allows exchanges to offer weekly expiring derivatives contracts on only one of their benchmark indices. This adjustment aims to reduce the number of expiries available, minimizing opportunities for market manipulation that can arise during these periods.
2. Increased Minimum Trading Amount
The minimum trading threshold in the derivatives market will rise from the current range of Rs 5-10 lakh to Rs 15 lakh. Eventually, this will increase to fall between Rs 15 lakh and Rs 20 lakh. The goal is to limit participation by smaller investors who may not possess the risk tolerance necessary for derivatives trading, thus protecting them from potentially substantial financial losses.
3. Upfront Collection of Option Premiums
Brokers will be required to collect option premiums upfront from buyers, curbing excessive intraday leverage and reducing the likelihood of defaults. This measure ensures that traders pay the premium before engaging in trading, thus aligning with responsible trading practices.
4. Elimination of Calendar Spread Benefits
SEBI has removed the calendar spread treatment for expiry days. Calendar spreads, which involve holding positions in contracts with different expiries, will no longer receive favorable treatment. This change aims to prevent traders from exploiting price differences across contract expiries.
5. Intraday Monitoring of Position Limits
Stock exchanges will now monitor position limits for index derivatives on an intraday basis. By ensuring continuous surveillance, SEBI aims to prevent large traders from influencing the market and manipulating prices through large positions.
6. Increased Contract Size and Tail Risk Protection
The size of F&O contracts has been increased, along with the implementation of additional Extreme Loss Margins (ELM) to cover potential tail risk. This move is designed to ensure that market participants are better protected against extreme and unexpected price movements.
Formation of a Working Group
SEBI has also constituted a 15-member working group to review and recommend further improvements for investor protection and risk management in the equity derivatives market. The group includes representatives from stock exchanges, clearing corporations, and other key market players, ensuring diverse perspectives on how to enhance the market’s safety and efficiency.
Conclusion
SEBI’s new regulations are a clear effort to promote market stability and protect investor interests. While some traders might face short-term challenges as they adapt to these changes, the long-term outlook points towards a healthier and more transparent derivatives market. These reforms underscore SEBI’s commitment to creating a fairer and less speculative environment, ensuring market participants engage responsibly while reducing overall systemic risk.
Leave a Reply