SEBI F And O rule changes

SEBI Tightens F&O Rules Effective Nov 20:Daily Expiries End, Contract Sizes Increase

The Securities and Exchange Board of India (SEBI) has introduced a series of reforms aimed at tightening the rules governing futures and options (F&O) trading, effective from November 20, 2024. These changes focus on index derivative contracts, reducing speculative activity, and increasing market stability.

1. Rationalisation of Contracts to Weekly Expiries:
   • SEBI has mandated that derivative contracts should only be available on one index per exchange with weekly expiries.
   • This decision is driven by the speculative nature of trading on expiry days, particularly in index options, which leads to volatility and short holding periods for positions.
2. Increase in Contract Sizes:
   • The contract size will be increased to ensure that the minimum trading amount is Rs 15 lakh to Rs 20 lakh, up from the current range of Rs 5-10 lakh.
   • This change is intended to align contract sizes with the growth of the market and to reduce speculative risk by ensuring that participants are exposed to an appropriate level of risk.
3. Higher Margin Requirements (Extreme Loss Margin):
   • SEBI has introduced a 2% additional extreme loss margin (ELM) for short options contracts on their expiry day to protect against tail risk, i.e., extreme market movements.
   • This measure is aimed at curbing speculative trading on expiry days.
4. Upfront Collection of Option Premium:
   • To avoid any undue leverage, SEBI now mandates the collection of net option premiums upfront from buyers.
   • This rule prevents clients from taking positions without sufficient collateral.
5. Removal of Calendar Spread Benefit on Expiry Day:
   • SEBI has removed the calendar spread benefit, which allowed offsetting positions across different expiries, for contracts that expire on the same day. This aims to address the volatility seen on expiry days.
6. Intraday Monitoring of Position Limits:
   • Exchanges are now required to monitor position limits multiple times during the day, as opposed to only at the end of the day. This prevents excessive speculative positions from going undetected throughout the trading day.

Advantages:

• Market Stability: The new rules promote more stable trading conditions by reducing volatility, especially on expiry days.
• Protection for Investors: The measures ensure that retail investors are better protected from the highly speculative nature of F&O trading.
• Increased Accountability: Upfront collection of premiums and monitoring of intraday position limits ensure that traders maintain adequate margins and do not engage in over-leveraging.
• Reduced Speculative Activity: By limiting the availability of contracts and increasing contract sizes, SEBI aims to curb speculative trading.

Disadvantages:

• Higher Entry Barrier for Retail Investors: With the increase in contract sizes, retail investors may find it more difficult to participate in the derivatives market due to higher capital requirements.
• Potential Liquidity Issues: Restricting derivatives contracts to weekly expiries may reduce liquidity in daily expiries, which are popular among traders.
• Operational Challenges: Brokers and exchanges may face operational challenges in adapting to the new rules, such as the need for more frequent intraday monitoring of position limits.

Conclusion:

SEBI’s tightening of F&O rules is a well-thought-out move aimed at curbing the speculative nature of index derivatives trading while ensuring market stability and protecting investors. By rationalizing contract expiries, increasing contract sizes, and imposing higher margin requirements, SEBI seeks to create a more responsible trading environment. While these measures may pose challenges to retail investors and operational burdens for brokers, they are expected to reduce market volatility and improve the overall integrity of the derivatives market.

FAQs:

1. What are the key changes in the F&O rules? SEBI has introduced several changes, including limiting derivative contracts to weekly expiries, increasing the minimum contract size to Rs 15-20 lakh, mandating upfront collection of option premiums, and increasing margin requirements for expiry day trading.
2. Why did SEBI increase contract sizes? The market has grown significantly since the last review in 2015. SEBI increased contract sizes to align with market growth and to ensure that traders take on appropriate levels of risk.
3. How will the new rules affect retail investors? The new rules may create a higher barrier to entry for retail investors due to increased contract sizes and margin requirements, potentially limiting their participation in derivatives trading.
4. When will these changes take effect? The new rules will be rolled out in phases, with key changes like weekly expiries and increased contract sizes starting from November 20, 2024. Additional measures, such as upfront premium collection and intraday monitoring of positions, will be introduced by early 2025.
5. What is the rationale behind removing daily expiries? SEBI observed that daily expiries lead to speculative trading and volatility, particularly on expiry days, with minimal benefits for long-term capital formation. Limiting contracts to weekly expiries reduces these risks.
6. What is the purpose of the additional extreme loss margin (ELM)? The 2% ELM is designed to protect the market against extreme events (tail risks) by requiring additional margin coverage for short options on expiry days.

SEBI F And O rule changes

TCS to Announce Q2 Results and Consider Interim Dividend on October 10, 2024