Effective from November 20, the Securities and Exchange Board of India (SEBI) has introduced new rules for the futures and options (F&O) market to protect retail investors and make trading safer. These changes aim to reduce risk, limit speculation, and maintain stability in the financial markets. The new rules will affect contract sizes, margin requirements, and the number of available contracts, with a particular focus on curbing excessive trading in F&O. Let’s take a closer look at the key changes and how they impact retail investors.
1. Increase in Contract Size to Reduce Speculation
One of the significant changes SEBI has made is the increase in contract sizes for index futures and options. Previously, contract sizes ranged between ₹5 lakh and ₹10 lakh. Now, SEBI has raised the minimum contract size to ₹15 lakh. This change is designed to reduce speculative trading by small retail investors who often take high risks and end up with heavy losses.
2. Fewer Weekly Contracts to Limit Risk
SEBI has also decided to reduce the number of weekly option contracts. Currently, each exchange offers multiple weekly expiry contracts, which creates many opportunities for high-risk trades. Under the new rules, SEBI will limit this to one benchmark index per exchange, meaning a maximum of six weekly contracts will be available in a month, compared to the 18 contracts available now.
By cutting down on the number of contracts, SEBI aims to reduce the number of “naked” or uncovered option selling, which carries high risk. Fewer contracts will likely lead to more cautious trading and a more stable market environment. While this may limit the trading opportunities for some investors, it will help create a safer and more controlled market.
3. Changes in Margin Rules
SEBI’s new margin requirements are another important change. Cross-margin benefits for calendar contracts will no longer be available on the last day of trading, forcing investors to roll over their positions earlier. This adjustment is aimed at reducing last-minute speculative trades that can cause significant market fluctuations on expiry days.
Although the margin hike was smaller than initially expected, experts believe that it will still impact retail participation. The additional margin required on expiry day will now be 2%, which is less than the 3% originally proposed. This reduced hike may soften the impact on small traders, but it still represents a tightening of rules that will make speculative trading more difficult.
4. Phased Implementation for Smoother Transition
SEBI has also introduced a phased implementation plan for these new rules. The reduction in weekly contracts, higher contract sizes, and new margin requirements will be implemented gradually over the next 3 to 6 months. This staggered approach will help prevent sudden disruptions in the market and allow investors time to adjust to the new regulations.
The first changes will start in February 2025, with additional measures like intraday monitoring of position limits coming into effect by April 2025. This gradual tightening will help maintain market health without causing panic or instability.
SEBI’s new rules for the F&O segment are designed to protect retail investors from excessive risks and losses. The increase in contract sizes, fewer weekly contracts, and stricter margin requirements will make the market safer and more stable. While some retail traders may face challenges due to the new rules, the long-term benefits of these changes are expected to outweigh the short-term difficulties. By reducing speculation and promoting safer trading practices, SEBI is working to create a healthier market environment for everyone.
