SEBI INTRODUCES 6 NEW MEASURES FOR FNO TRADING TO PROTECT SMALL INVESTOR
4 months ago
The Securities and Exchange Board of India (SEBI) released a circular on October 1, 2024, introducing six new measures for futures and options trading. These changes, which are set to be implemented in phases, are designed to curb speculative trading, protect retail investors, and enhance market stability.
Here’s a breakdown of the changes introduced by SEBI for F&O traders and their impact:
1. Increased contract size
SEBI has increased the contract size for index F&O contracts from the current range of ₹5-10 lakh to ₹15 lakhs to ₹20 lakhs. This will be effective from November 20, 2024.
Impact: This will raise the lot size for index F&O contracts and proportionally increase margin requirements.
Approximate increase in lot sizes:
Index
Current lot size
New lot size
NIFTY
25
60
BANKNIFTY
15
30
FINNIFTY
25
65
NIFTYNXT50
10
20
MIDCPNIFTY
50
115
SENSEX
10
20
BANKEX
15
25
2. Limiting weekly index expiry contracts
Currently, there are a total of 6 weekly expiry contracts – NSE has four weekly expiry contracts linked to Nifty, Bank Nifty, FINNIFTY and Nifty Midcap and BSE has two Sensex and Bankex. As per the new rules, stock exchanges can only have one weekly expiry contract on one benchmark index.
Impact: Starting November 20, 2024, SE can offer weekly expiry for either the Nifty 50 or Bank Nifty, but not both. Similarly, BSE can offer weekly expiry for either Sensex or Bankex. All other indices will only have monthly expiry.
3. Upfront collection of premium for the option buyer
Effective February 1, 2025, brokers will be required to collect the full option premium upfront from option buyers. This change has been introduced to prevent excessive intraday leverage, hence curbing speculative activities.
Impact: If you are an option buyer, now you will need to pay the full option premium upfront. For instance, earlier, if you set a stop loss at ₹90 for a ₹100 option (cover order), you were required to pay the maximum potential loss instead of the full premium. But with the new rule, you will have to pay the full option premium upfront, so using leverage to cut costs won’t be possible anymore.
4. Removal of calendar spread benefit on expiry day
The regular has removed the benefit of offsetting positions across different expiries, referred to as calendar spreads, on expiry day. A calendar spread is a futures or options strategy where a trader simultaneously enters long and short positions on the same underlying asset but with different expiry dates. Currently, if you have a short option expiring on 31st October with a margin of ₹5 lakhs and a long option expiring on 28th November with a margin of an equal amount, since your short position is hedged by the long one, you get a margin benefit and need only ₹5 lakhs instead of ₹ 10 lakhs.
By curtailing margin benefits for calendar spreads, SEBI aims to curb the speculative trading that has been rampant on expiry days.
Impact: From 1st February 2025, you will no longer get margin benefit on calendar spread. You’ll need to maintain the full margin applicable for both the long and short positions you have entered.
5. Intraday Monitoring of Position Limits
SEBI has set limits on the maximum positions a single client or broker can hold for a specific index derivative contract. At present, SEBI mandates stock exchanges to monitor position limits on the index derivative contracts at the end of each trading day.
Starting 1st April 2025, SEBI has introduced intraday monitoring, where the broker’s position limits will be checked four times during the trading session. This change will reduce the risk of traders exceeding permissible limits going unnoticed.
Impact: If your broker or you exceed the mandated market-wide position limit, you will not be able to trade in that contract during the day.
6. Increase in tail risk coverage on expiry day
To control potential risks due to increased volatility observed on expiry days, SEBI has introduced an additional extreme loss margin (ELM) of 2% for all open short options on the day of expiry. This measure is intended to protect investors from extreme market fluctuations on expiry.
Impact: As an option seller, a 2% ELM will be applied to your short positions on expiry day. Note that ELM is calculated on contract value, (i.e. strike price * lot size).
What will be the impact of these changes?
Reduced speculation: The increase in contract value and removal of calendar spread benefits is expected to deter speculative trading, especially among small retail participants who may not have the financial capacity to absorb larger losses.
Lower participation in options trading: The reduction in the number of weekly expiries and an increase in the contract value will dissuade small traders from participating in futures and options markets. According to a study by SEBI, 9 out of 10 individual F&O traders lose money. These steps are aimed at protecting the interest of small investors. are likely to decrease retail participation in options trading.
Market stability: The phased rollout of these measures is designed to prevent sudden shocks to the market, allowing participants to adapt to the changes over time. This gradual tightening could lead to a healthier market environment overall.
Impact on trading strategies: Retail investors will need to reassess their trading strategies in light of these new rules, particularly regarding the timing of rollovers and the management of margin requirements.
Wrapping up
The changes introduced by SEBI for equity derivatives are a clear indication of the regulator’s commitment to protecting small investors and maintaining market integrity. While these changes may present challenges for some retail participants, they are ultimately aimed at fostering a more stable and sustainable trading environment.
