The Securities and Exchange Board of India (Sebi) has introduced several new rules aimed at improving stability in the market and protecting the interests of retail investors. These changes are part of Sebi’s ongoing efforts to make the futures and options (F&O) segment of the market safer and more transparent. Starting today, November 20, 2024, some important changes in the derivatives market will take effect. Let’s take a closer look at these changes and what they mean for traders.
Reduction of Weekly Expiries
One of the key changes is the reduction of weekly expiries for index derivative contracts. As per the new rule, there will now be only one weekly expiry per benchmark index per exchange. This change is designed to curb speculative trading and reduce the risks associated with uncovered or naked option selling. Speculative trading, where investors take high risks without having enough collateral, can cause unnecessary market fluctuations. By limiting the number of weekly expiries, SEBI aims to make the market more stable.
Increased Contract Sizes
Another significant change is the increase in contract sizes for derivatives. Previously, the minimum trading amount for derivatives was between Rs 5 lakh and Rs 10 lakh, but starting today, it will increase to Rs 15 lakh. This means investors will need to have a larger amount of money to participate in the market. This step aims to ensure that investors take on appropriate risks and do not overextend themselves in the derivatives market. In the future, SEBI plans to adjust the contract values to be between Rs 15 lakh and Rs 20 lakh.
Higher Margin Requirements
SEBI is also increasing the margin requirements for traders. To improve protection against extreme market fluctuations, SEBI will implement an additional Extreme Loss Margin (ELM) of 2% for all open short options on expiry days. This means that investors who have open positions on the day of options expiry will need to set aside more funds to cover potential losses. The goal is to protect investors during high-volume trading sessions, which can be more volatile.
Upfront Collection of Premiums
Starting February 1, 2025, brokers will be required to collect option premiums upfront. This means that traders will need to pay for their options positions before they open them. This move is designed to discourage excessive intraday leverage and ensure that investors have enough collateral to cover their trades. It will help prevent situations where traders take on too much risk without having enough funds to support their positions.
Removal of Calendar Spread Benefits
SEBI is also eliminating the practice of calendar spreads in the derivatives market. A calendar spread involves offsetting positions across different expiries, and this practice will no longer be allowed for contracts that expire on the same day. The aim of this change is to reduce speculative trading, especially on expiry days when there can be large price swings.
Intraday Monitoring of Position Limits
Finally, from April 1, 2025, stock exchanges will begin intraday monitoring of position limits for equity index derivatives. This means that exchanges will monitor traders’ positions throughout the day to ensure they do not exceed the allowable limits. This will reduce the chances of traders unknowingly violating position limits, which can lead to unnecessary risks.
These new rules by SEBI are designed to make the derivatives market safer and more transparent. By reducing speculative trading, increasing margin requirements, and implementing other changes, SEBI is taking steps to protect investors and ensure the stability of the market. As these changes come into effect, investors need to stay informed and adjust their strategies accordingly.
