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Mahesh

04/10/24 10:01 AM IST

New SEBI rules to curb F&O frenzy

In News
  • Markets regulator Securities and Exchange Board of India (SEBI) has released a set of six measures to strengthen the equity index derivatives — also known as equity futures & options (F&O) — framework.
Major Changes
Contract size for index derivatives recalibrated
  • The minimum contract size at the time of its introduction in the market has been recalibrated to Rs 15 lakh from the existing stipulation of Rs 5-10 lakh.
  • The regulator has said that the contract size should be fixed in such a way that the contract value of the derivative on the day of review is Rs 15-20 lakh.
  • This step raises the entry barrier, and seeks to ensure that participants in the derivatives market take on appropriate risks.
  • Retail players in tier 2 and tier 3 cities will need to re-strategise on account of the increase in the minimum index derivatives contract value from Rs 5 lakh to Rs 15 lakh at the time of introduction.
Upfront collection of options premium
  • To deny undue intra-day leverage to the end client, and discourage the practice of allowing positions beyond the collateral at the end client-level, SEBI has mandated the collection of options premium upfront from options buyers by the trading member (TM) or the clearing member (CM).
  • The new rule will be applicable from February 1, 2025.
  • The aim is to instill discipline, reduce aggressive short-term speculation, and mitigate the risk of defaults due to overleveraged positions.
Rationalisation of weekly index derivatives products
  • SEBI has said that expiry-day trading in index options at a time when option premiums are low, is largely speculative.
  • Stock exchanges offer short-tenure options contracts on indices which expire on every day of the week, leading to hyperactive trading in index options on expiry day.
  • SEBI has directed that “henceforth, each exchange may provide derivatives contracts for only one of its benchmark index with weekly expiry”. This will be effective from November 20.
Intra-day monitoring of position limits
  • Amid large volumes of trading on expiry day, there is a possibility of undetected intra-day positions beyond permissible limits.
  • “To address the risk of position creation beyond permissible limits…existing position limits for equity index derivatives shall henceforth also be monitored intra-day by exchanges,” SEBI said. This will be effective from April 1, 2025.
Removal of ‘calendar spread’ treatment on expiry day
  • Expiry day can see significant ‘basis’ risk, where the value of a contract expiring on the day can move very differently from the value of similar contracts expiring in future.
  • Given the large volumes on expiry day, from February 1, 2025, the benefit of offsetting positions across different expiries (‘calendar spread’) will not be available on the day of expiry for contracts expiring on that day.
Increase in ‘tail risk’ coverage on day of expiry
  • The regulator has increased the ‘tail risk’ coverage by levying an additional ‘Extreme Loss Margin’ (ELM) of 2% for short options contracts.
  • ELM is the margin that exchanges charge over and above the normal margin requirement. Tail risk is the chance of a loss due to a rare event.
  •  This will ensure that market participants have more skin in the game, particularly on days when volatility spikes.
Source- Indian Express

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