SEBI F&O Proposals Decoded

The Securities and Exchange Board of India (SEBI) has put forward new measures to strengthen the framework for index derivatives (futures & options) to protect investors and enhance market stability. Below is an analysis of these proposals and their potential impact:

1. Rationalization of Strike Prices for Options:

Current Practice: Nifty and Bank Nifty options have around 70 and 90 strike prices, respectively, covering about 7-8% of index movement daily.

Proposed Change: Limit to 50 strike prices at contract launch with a uniform interval near the prevailing price, adjustable up to 8% if needed.

• Upfront Collection of Options Premium:

Current Practice: Margins are collected for futures and short options positions, but not for options buyers.

Proposed Change: Collect options premiums upfront from buyers.

• Removal of Calendar Spread Benefit on Expiry Day:

Current Practice: Margin benefits apply for F&O positions with different expiries on the expiry day.

Proposed Change: No margin benefits for contracts expiring on the same day.

• Intraday Monitoring of Position Limits:

Current Practice: Position limits monitored at the end of the day.

Proposed Change: Monitor position limits intraday with a gradual implementation plan.

• Minimum Contract Size:

Current Practice: Minimum contract size is Rs 5 – Rs 10 lakh.

Proposed Change: Increase to Rs 15 – Rs 20 lakh initially, then to Rs 20 – Rs 30 lakh after six months.

• Rationalization of Weekly Index Products:

Current Practice: Weekly expiries take place every single day on various bourses       Global Markets.

Proposed Change: Only one benchmark index per exchange should have a weekly expiry day.

• Increase in Margin Near Contract Expiry:

Current Practice: There will be no additional margin access to traders on the last two trading days of expiry.

Proposed Change: An addition of 3% Extreme Loss Margin (ELM) on the penultimate day, which will then be increased to 5% on the last day.

Why These Measures?

Sebi aims to curb excessive speculative trading, as household savings lost through derivatives trading is a macro concern. The aim is to redirect these savings into more productive investments like IPOs and mutual funds. Data shows significant losses among retail investors in index derivatives, prompting Sebi to seek public comments on these proposals by August 20, 2024.