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The Securities and Exchange Board of India (SEBI) has implemented stricter regulations for equity index derivatives trading to curb speculative activities and promote market stability. These measures include raising the minimum contract size, mandating upfront collection of option premiums, and introducing new stress testing methodologies for the equity derivatives segment.
The primary objective of SEBI's new framework is to address concerns regarding the rapid increase in F&O trading volumes, which have become a macroeconomic issue over the past two years. The substantial rise in F&O trading volumes has led to increasing household savings being channeled into these instruments, potentially hindering investment and economic growth.
SEBI's measures aim to reduce excessive speculation by increasing the minimum contract size for index futures and index options from Rs5 lakh to Rs10 lakh and subsequently to Rs15 lakh. This adjustment aims to discourage smaller players from participating in high-risk derivative trading, thereby mitigating potential market instability.
Moreover, SEBI has mandated the upfront collection of option premiums from buyers, effective from February 1, 2025. This change aims to ensure that option buyers have sufficient funds to cover potential losses, thus reducing the risk of default and ensuring greater financial stability within the derivatives market.
SEBI's new stress testing methodologies for equity derivatives will enhance the determination of the minimum required corpus (MRC) for the core settlement guarantee fund (Core SGF). These stress tests are designed to better account for changing market dynamics and assess risks more effectively, ensuring the financial resilience of the derivatives market.
Other significant measures introduced by SEBI include intraday monitoring of position limits, removal of calendar spread benefit on expiry day, rationalization of weekly index derivatives, and increased tail risk coverage. These measures will be implemented in a phased manner, beginning in November 2024, to ensure a smooth transition and allow market participants to adapt to the new regulations.
Source: SEBI Tightens Regulations on Equity Derivatives Trading