The Securities and Exchange Board of India (Sebi) on Tuesday released a consultation paper on measures to strengthen index derivatives (futures & options) framework for increased investor protection and market stability.
The objective of the proposed measures is to enhance investor protection and promoter market stability in derivatives markets, while ensuring sustained capital formation.
Here’s all that you need to know about what measures the Sebi has proposed, how will these impact derivatives |(F&O) traders and what does expert opine on the same.
Here are the SEVEN key Sebi proposals in the F&O consultation paper?
1. Rationalization of strike price for options
Existing Practice: Nifty and Bank Nifty options strikes cover roughly 7-8 per cent of index movement on the given day, with additional strikes introduced if the situation warrants so. Nifty has a total of up to 70 options strikes, while Bank Nifty around 90.
Proposed: Not more than 50 strikes to be introduced at the time of contract launch. Strike interval to be uniform near prevailing price (around 4 per cent) and may go up to 8 per cent if need be.
2. Upfront collection of options premium
Existing Practice: There is a stipulation to collect margin for futures positions both on the long and sell side; and short positions in options. However, there is no stipulation of upfront collection of options premium from options buyer.
Proposed: To collect Option premiums on an upfront basis.
3. Removal of calendar spread benefit on expiry day
Existing Practice: Calendar spread margin applies on expiry day for two F&O positions with different expiries as against two normal F&O positions. This helps in significantly reducing margin requirement.
Proposal: No calendar spread margin for contracts expiring on the same day.
4. Intraday monitoring of position limits
Existing Practice: Limits monitored at the end of the day by MIIs (Clearing Corporations/ Stock Exchanges)
Proposed: Position limits for index derivatives to be monitored on intra-day basis, with an appropriate short-term fix, and a glide path for full implementation.
5. Minimum contract size
Existing Practice: Minimum contract size requirement of Rs 5 – Rs 10 lakh was set in 2015.
Proposed: In Phase 1, the minimum value at the time of contract introduction to be between Rs 15 – Rs 20 lakh. Phase 2, after 6 months, implementation of minimum contract size of Rs 20 – Rs 30 lakh proposed.
6. Rationalization of weekly index products
Existing Practice: Weekly expiry of index derivatives has resulted into one expiry every single day of the week across indices/ exchanges.
Proposed: Weekly expiry for 1 benchmark index per exchange.
7. Increase in margin near contract expiry
Existing Practice: No additional margin required in the last two trading days of the expiry.
Proposed: Additional 3 per cent Extreme Loss Margin (ELM) to be collected at the start of penultimate day of the contract expiry. On the last day, ELM to be increased to 5 per cent.
Why did Sebi propose these measures?
While releasing the consultation paper, Sebi chief Mahabai Puri Buch said an annual loss of Rs 50,000 – Rs 60,000 crore of household savings through derivatives trading is a macro concern. The same money could get deployed into IPOs, mutual funds or other productive use for the Indian economy.
Sebi believes there is excessive speculative trading activity taking place in F&O. NSE data shows that retail investors alone account for around 50 per cent of the trading volumes in index derivatives; leaving behind proprietorship traders, foreign investors and domestic institutional investors.
As per Sebi, the cumulative trading loss incurred by 9.25 million unique individuals and proprietorship traders in the index derivatives of NSE along stood at Rs 51,689 crore in FY24.
What happens next?
With publication of this Consultation paper, Sebi has invited public comments and suggestions from other interested stakeholders along with support rationale through its web based portal or alternatively via email latest by August 20, 2024.
What experts have to say?
Dhiraj Relli, MD & CEO of HDFC Securities believes that the measures announced by Sebi are to control the exuberance in equity derivatives; and the proposal to rationalize weekly expiry shall impact trading volumes.
“One of the proposals is to rationalize weekly expiry and restrict it to one per week on the benchmark index per Exchange. This change will likely impact volumes, as the recent volumes in the equity derivatives segment have been driven by weekly expiries.” said Dhiraj Relli in a note.
These may not be the only interventions by the regulator. We may see more measures, including product suitability, customer-level certification, etc. With the realignment of Exchange transaction charges, higher STT introduced in the budget, and the proposed regulatory framework, it is expected that there could be rationalization in Equity Derivatives volumes, Dhiraj added.
Meanwhile, foreign investment firm Jefferies believes the Sebi proposals could see divergent impact on market players; with exchanges and retail-focused brokers being most affected.
First Published: Jul 31 2024 | 9:41 AM IST
