The Securities and Exchange Board of India (SEBI) has initiated a crackdown on the problems associated with Futures and Options (F&O) trading. In a bid to safeguard retail investors, SEBI has recommended seven key measures to address and rectify these issues.
On a day when SEBI Chairperson Madhabi Puri Buch revealed that households across the country are losing up to ₹60,000 crore annually due to issues in the Futures and Options (F&O) segment, the regulator has proposed stricter regulations for index derivatives. In a consultation paper released on Tuesday, SEBI outlined several measures designed to protect small traders. These include rationalizing strike prices, introducing weekly index products, implementing intraday monitoring of position limits, eliminating calendar spread benefits on expiry days, and increasing margins for contracts nearing expiration.
Key Proposals from SEBI:
1.Contract Size Adjustment:
Phase 1: Introduce a minimum contract size of ₹15 lakh to ₹20 lakh.
Phase 2: Increase the minimum contract size to ₹20 lakh to ₹30 lakh after six months.
2. Strike Price Rationalization:
– Options will have a uniform strike interval of 4% around the prevailing index price.
– Introduce new strike prices daily to maintain these intervals, limiting the total to a maximum of 50 at the time of introduction.
– Expand strike intervals beyond the initial coverage to reduce the number of strikes further from the index price.
3. Option Premiums:
– Require members to collect option premiums from clients upfront.
4. Calendar Spread Benefit:
– Remove margin benefits for calendar spread positions on contracts expiring on the same day.
5.Intraday Monitoring:
– Monitor position limits for index derivatives intraday by clearing corporations and stock exchanges.
6. Weekly Options Contracts:
– Provide weekly options contracts on a single benchmark index.
Online brokerages are anticipating a significant impact on their revenues as the Securities and Exchange Board of India (SEBI) intensifies efforts to address the challenges associated with futures and options (F&O) trading in India.
On July 30, SEBI released a consultation paper proposing seven key recommendations aimed at overhauling the index derivatives framework to enhance investor protection and market stability.
The proposed changes include several adjustments to the existing system, such as requiring upfront collection of option premiums, stricter monitoring of position limits, raising minimum contract sizes for F&Os, and eliminating calendar spread benefits, among other measures.
SEBI has invited feedback from industry stakeholders, investors, and the public on this draft paper by August 20, after which the regulator will consider issuing final regulations.
Before examining the potential impact of these draft norms on the investment technology sector, let’s review the seven recommendations made by SEBI:
- Strike Price Rationalization:
- Strike prices will be set at intervals of 4% around the index price, increasing to 8% as they move further from prevailing prices.
- Upfront Collection of Options Premium:
- Sellers will be required to collect option premiums, the fees paid by buyers for the right to buy or sell shares, upfront.
- Elimination of Calendar Spread Benefit on Expiry Day:
- Calendar spread positions, where options are bought and sold at the same strike price either in the short or long term, will be disallowed for contracts expiring on the same day.
- Intraday Monitoring of Position Limits:
- Position limits, which restrict the amount of shares or options held, will be monitored intraday rather than at the end of the trading day.
- Minimum Contract Size:
- SEBI proposes revising the minimum contract size for index derivatives in two phases. In Phase 1, starting six months after the implementation of the new norms, lot sizes will be set between ₹15 lakh and ₹20 lakh. In Phase 2, this will increase to between ₹20 lakh and ₹30 lakh.
- Rationalization of Weekly Index Products:
- Weekly options will be offered on a single benchmark index of an exchange.
- Extension of Margins for Contract Expiry:
- The extreme loss margin (ELM), an additional margin charged by exchanges, will be increased by 3% at the start of the day before expiry and another 3% on the expiry day.
These recommendations, if adopted, could significantly impact online brokerage firms, many of which generate substantial revenue from F&O trading. According to industry sources, F&O and intraday trading contribute to over 80% of user growth and revenue for platforms like Zerodha, Groww, and Angel One.
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