The Securities and Exchange Board of India (SEBI) has introduced new guidelines aimed at regulating high-risk futures and options (F&O) trading, bringing significant changes to the derivatives market. These changes are designed to improve risk management, curb excessive speculation, and ensure overall market stability. Effective from November 2024, the guidelines will impact both equity index derivatives and weekly expiries, while enhancing protection against extreme market risks, commonly known as tail risks.
Key Highlights of SEBI’s New Guidelines for F&O Trading
1. Upfront Collection of Option Premium (Effective February 2025)
In response to the high leverage involved in options trading, SEBI has mandated the upfront collection of option premiums. This requirement will be enforced starting February 1, 2025, for the equity derivatives segment, aimed at reducing market risks.
2. Removal of Calendar Spread Benefit on Expiry Day (Effective February 2025)
SEBI will eliminate the calendar spread margin benefit on contract expiry days. This move targets the high volumes and risks typically seen on expiry days. The change, which aligns with cross-margin rules on correlated indices, will take effect from February 2025.
3. Intraday Monitoring of Position Limits (Effective April 2025)
To prevent excessive position-taking, SEBI has instructed stock exchanges to conduct intraday monitoring of position limits for equity index derivatives, especially on expiry days. Exchanges will take at least four intraday snapshots to track positions, starting from April 1, 2025.
4. Increased Contract Size for Index Derivatives (Effective November 2024)
From November 20, 2024, the minimum contract size for index futures and options will increase from ₹5-10 lakh to ₹15 lakh. This change is aimed at ensuring that traders have the financial capacity to handle the risks and leverage associated with derivatives trading.
5. Limiting Weekly Expiries to One per Exchange (Effective November 2024)
In a bid to reduce speculative trading, SEBI will restrict weekly index derivative contracts to one benchmark index per exchange. This change will take effect from November 20, 2024, meaning both BSE and NSE can each offer only one weekly expiry contract.
6. Increased Tail Risk Coverage
SEBI has introduced an additional 2% Extreme Loss Margin (ELM) on short options contracts to increase protection against tail risks. This will apply to all open short positions on the day of expiry and to any short options initiated on that day. This measure addresses the heightened risk of loss in volatile markets.
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Impact on Derivatives Trading
These changes are a direct response to the evolving nature of the futures and options market, which has seen an increase in retail participation and speculative activity. By limiting weekly expiries and increasing contract sizes, SEBI aims to reduce the volume of speculative trading, especially on expiry days, while ensuring that traders are adequately prepared for the inherent risks of derivatives trading.
Key Dates for Implementation
- November 20, 2024: New contract sizes and weekly expiry limitations come into effect.
- February 1, 2025: Upfront collection of option premiums and removal of calendar spread benefit on expiry day.
- April 1, 2025: Intraday monitoring of position limits begins.
The Need for Stronger Risk Management
SEBI’s focus on increasing tail risk coverage and tightening risk management measures comes after a study revealed that from April 2021 to March 2024, individual traders in India experienced net losses of ₹1.81 lakh crore in futures and options trading. During this period, only 7.2% of traders managed to turn a profit, while retail investors incurred losses amounting to ₹524 billion. In contrast, proprietary traders and foreign investors earned significant profits.
These new guidelines underscore SEBI’s commitment to fostering a more stable and transparent derivatives market in India. As traders and investors adjust to these changes, staying informed and prepared will be crucial. The implementation of these rules marks a transformative phase for the futures and options trading landscape, promoting greater stability and protection against market volatility.
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