The Securities and Exchange Board of India released a circular on 1^st October to increase market stability and to protect investors. Experts and investors in the market speculated on the regulations following a recent study, which showed that 93% of future and option traders have incurred losses. These regulations aim to curb high-risk investments in equity derivatives trading.

To review the existing regulations for investor protection and market stability SEBI formed an Expert Working Group (EWG) on equity derivatives. Based on the recommendations of EWG the SEBI sought comments from stakeholders, following which it considered six measures to strengthen the equity Index derivatives framework.

These six measures are as follows-

1. Upfront collection of Option Premium from buyers-

This is to discourage the margin offered by the brokers to the end client. Let us say Dabur is trading at Rs 500 per stock. You can purchase its options at 50. Now, you want to purchase a lot of 25 stocks. So, you need to invest 1250. But you do not have that cash. In those cases, some brokers used to offer the client margins to buy the lot at let’s say 750 or 900. Following February 1, 2025, no such margins can be offered by the broker to their client. Trading Member (TM)/ Clearing Member (CM) are expected to collect the Initial Margin (IM) and Extreme Loss Margin (ELM) upfront from the option buyers.

2. Removal of calendar spread treatment on the expiry day-

Calendar trading is the process of buying and selling options of different expiries with the same underlying security. SEBI tends to remove this starting from 1^st February 2025. This is done to limit the volume of trading. According to the SEBI study, 1.8 lakh crore of money moved from retail traders to the institutions. SEBI wants to limit the loss of retail traders.

“As an illustration, if monthly expiries are on the 29^th (current month), 30^th (next month) and 31^st (far month) respectively, then calendar spread positions involving positions expiring on the 29^th (current month) and 30^th (next month), or 29^th (current month) and 31^st (far month), shall not be provided calendar spread treatment on 29^th (current month expiry). However, calendar spread positions involving positions expiring on 30^th (next month) and 31^st (far month) shall continue to receive calendar spread treatment on 29^th (current month expiry)” read the circular.

3. Intraday monitoring of positioning limits-

There is a limit for every broker or client based on open interest. Open interest is the total number of outstanding options and futures trading available in the market. No client or broker is allowed to exceed that limit. This was earlier checked at the end of the day. Now the monitoring will be done throughout the day. A minimum of 4 position snapshots during the day will be availed. If any broker exceeds the open interest limit, they will be notified during the day. No further trade will be allowed following the squandering of the limit. However, they can exit from the existing contracts. This is to be implemented on 1^st April 2024.

4. Contract size for index derivatives-

The contract size for index future and index options will have a value of not less than Rs 15 lakhs at the time of introduction in the market. Further, the lot size will be fixed in such a manner that the contract value is between Rs 15 lakhs to Rs 20 lakhs. This is to be effective from November 20, 2024.

5. Rationalization of weekly index derivatives-

The regulatory board noticed that there is hyperactive trading on the expiry day of options. This behaviour is responsible for the increasing volatility in the market. To specifically address the excessive trading volume each exchange is allowed to provide one expiry for only one of its benchmark index each week. This will also be implemented from November 20, 2024.

6. Increase in tail risk coverage on the day of options expiry-

SEBI has decided to levy an additional 2% Extreme Loss Margin for short option contracts starting from 20^th November 2024, to reduce speculative trading. This will be applicable for all open short options at the start of the day, during the day and contracts initiated on the day of expiry.

The rudimentary goal of these measures is to strengthen the index derivatives framework, reduce the volume of speculative trading, and enhance market stability. The SEBI study had shown that only 7.2% of individual F&O traders have made a profit over the last 3 years. As opined by market experts these regulations are likely to decrease the revenue of broking platforms like Zerodha or Angel One.