The Security And Exchange Board of India(SEBI) has developed a framework to strengthen the index derivative framework and protect retail traders. This step is also meant to improve market stability, including reducing multiple expiries in a particular week. SEBI has increased the minimum trading amount for derivatives from the current Rs 5-10 lakhs to Rs 15 lakhs, which will be further increased to Rs 15-20 lakhs. The market regulator reportedly highlighted that “The lot size will be fixed in such a manner that the contract value of the derivatives on the day of review will be within Rs 15-20 lakhs.”
The new rules will be rolled out in phases, starting from November 20. The first phase will witness an Index derivatives contract with weekly expiries, an increase in contract sizes and an increase in tail risk coverage by levying additional extreme loss margins. There will be additional changes from February 1, 2025, where there will be an upfront collection of premiums from option buyers and removal calendar spread benefits on expiry days. From April 1, 2025, there will be intraday monitoring of position limits.
Major changes implemented by the regulator:
1 – Currently, stock exchanges offer contracts that expire every day. The expiry day trading in the index is largely speculative owing to lesser premium requirements. Traders indulge in hyperactive trading and the holding period for some of the positions is in minutes which further increases the volatility during the expiry day. Therefore the regulator has mandated that each exchange have derivative contracts for one index in a week.
2 – SEBI highlighted that the contract sizes were last set in 2015. So there is an inherent necessity to recalibrate the contract sizes in tune with the growth of the market. This will ensure that the market participants are taking appropriate risks.
3 – Extreme loss margin is collected from traders to cover extreme market events. Due to the increased speculative activity during the expiry days, SEBI has decided to collect an additional 2% ELM to be collected from the traders. This would apply to all open short positions at the start of the day that are due for expiry that day.
4 – The regulator in October 2023 had mandated that brokers collect margins upfront. SEBI has now asked brokers to collect net option premiums too upfront. This is being done to avoid any undue intraday leverage to the end client. It has been decided to, mandate the collection of option premiums from option buyers by the trading member/clearing member.
5 – The benefit of calendar spread will no longer be available for contracts that are expiring that day. SEBI highlighted that this decision was taken after observing that the value of a contract expiring on a specific day can be more volatile and there can be large price fluctuations as compared to contracts expiring in the future.
6 – The position limits of the index contracts are now captured at the end of every day. The regulator has asked stock exchanges and clearing corporations to now capture these position limits at least 4 times a day. The press statement highlighted, “Amidst the large trading volume on expiry day, there is a possibility of undetected intraday positions beyond permissible limits during the day.”