The Securities and Exchange Board of India (SEBI) has thrown a curveball at retail traders with a sweeping overhaul of Futures and Options (F&O) rules, set to shake up the market from November 20. With daily expiries out and contract sizes tripling, these new regulations aim to curb speculative trading while making market stability a priority.
SEBI’s measures address concerns about highly speculative trading in index derivatives, particularly on expiry days. The regulator has noted that such trading can lead to increased volatility and pose risks to market stability.
One of the biggest shocks in SEBI’s new directive is the end of daily expiries for index options. Exchanges have been buzzing with hyperactive trading as retail investors jumped into short-term options, seeking quick profits. SEBI’s analysis showed that the speculative frenzy on expiry day, when option premiums are low and volatility spikes, was adding unnecessary instability to the market.
Starting November 20, only weekly expiries will be allowed, and each exchange can offer derivative contracts for just one benchmark index per week. This significant change aims to promote longer-term trades and ensure that the market isn’t overrun by speculators looking to cash in on daily expiries.
The increase in contract size is another major move aimed at cooling down speculative activity. The current F&O contracts, unchanged since 2015, are now being recalibrated to reflect market growth, with sizes set to triple. Previously, minimum contract values ranged from ₹5-10 lakh, but under the new rules, they will start at ₹15 lakh and may rise to ₹20 lakh.
This recalibration is intended to ensure that only those with substantial capital and risk appetite participate, adding a layer of in-built protection for market participants. While this move is likely to filter out inexperienced traders, it could also push many retail investors to the sidelines as higher entry barriers make it tougher for smaller players to participate in F&O trading.
SEBI’s push to control extreme market events (also known as tail risk) doesn’t stop there. A new rule adds an additional 2% Extreme Loss Margin (ELM) on all open short options on expiry day. This will apply both to options held at the start of the day and new positions created throughout the trading session. This is seen as another protective measure against the high volatility that often characterises expiry days.
Traders will also need to cough up option premiums upfront starting February 2025, as SEBI aims to eliminate undue leverage during the day. Brokers will be required to collect the full net option premium at the time of trade initiation. This rule is designed to protect brokers from clients overextending their positions without adequate collateral.
To prevent traders from exploiting loopholes, SEBI will now monitor position limits multiple times throughout the trading day instead of at the end of it. With large volumes of trades happening on expiry days, this move aims to catch any potential violations before they can spiral out of control.
What’s Next for Traders?
While these new measures aim to create a more stable and less speculative environment, they could make it significantly harder for retail traders to thrive in the F&O segment. With contract sizes ballooning and margins tightening, smaller players might struggle to keep up. Larger, institutional traders may adjust their strategies to align with the new norms, but retail traders will likely face the most challenges.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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