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SEBI has proposed new rules for futures and options trading citing investor protection reasons, market stability, and curbing speculative activities. 7 proposed changes addressing different aspects of F&O trading.
The Securities and Exchange Board of India (SEBI) has introduced a series of measures aimed at enhancing investor protection and promoting market stability within the index derivatives segment. These changes are designed to address the evolving market dynamics, particularly the increase in retail participation and the speculative trading volumes on expiry dates. This blog will explain these measures in detail, provide context on the current practices, and outline both the short-term and long-term impacts on traders, especially retail investors.
Objective:
The derivatives market aids in better price discovery, improves market liquidity, and allows investors to manage their risks. However, excessive speculative activity can endanger investor protection and market stability. SEBI's new measures aim to address these concerns.
Background:
The equity derivatives segment has seen increased retail participation and the introduction of short-tenure index options contracts. This has led to heightened speculative trading volumes, especially on expiry dates.
Weekly Options Contracts: Introduced in May 2016 on sectoral indices and later benchmark indices. Initially, these contracts expired on a single day of the week. However, there are multiple contracts on multiple indices on exchanges, which expire on different days of the week.
Trading Turnover: Derivatives market turnover in India has significantly surpassed cash market turnover. Retail investors' participation has surged post-COVID-19, with a notable shift towards index options contracts.
Current Practice:
Options strikes are introduced at uniform intervals around the prevailing index value. This can scatter trading activity and create sudden price movements.
Proposed Change:
Current Practice:
Only short options require margin; long options require payment of the premium by buyers, but there's no stipulation for upfront collection.
Proposed Change:
Members must collect option premiums upfront from clients.
Current Practice:
Margin benefits are given for offsetting positions on futures expiry.
Proposed Change:
No margin benefit will be provided for calendar spread positions involving contracts expiring on the same day.
Current Practice:
Position limits are monitored end-of-day.
Proposed Change:
Position limits will be monitored intraday by clearing corporations/stock exchanges.
Current Practice:
Last set in 2015, the minimum contract size ranges from ₹5 lakhs to ₹10 lakhs. SEBI points out that the indices have gone up 3 times in these 9 years.
Proposed Change:
Current Practice:
Weekly expiry index derivatives are offered by exchanges on all five trading days.
Proposed Change:
Weekly options contracts will be limited to a single benchmark index of an exchange.
Current Practice:
Margins do not account for increased risk near expiry.
Proposed Change:
Extreme Loss Margins or ELM will increase by 3% at the start of the day before expiry and the ELM will be further increased by 5% at the start of the expiry day.
When will it be Applicable?
These are proposed guidelines mentioned in the consultation paper, and the final guidelines will take effect after consideration of public comments on these measures, which are invited until August 20, 2024.
SEBI believes that its new measures aim to create a more stable and investor-friendly environment in the index derivatives market. By addressing speculative trading and enhancing risk management, SEBI seeks to protect retail investors and ensure long-term market stability. While these changes may increase trading costs in the short term, the long-term benefits of a more stable and transparent market will outweigh these initial challenges.
Source: SEBI Circular
Investments in the securities market are subject to market risk, read all related documents carefully before investing.
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