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The Securities and Exchange Board of India (SEBI) has implemented a series of stringent measures aimed at bolstering the index derivative framework, with the primary objective of safeguarding investors and enhancing market stability. These new regulations, effective from November 20, 2023, represent a significant shift in the landscape of derivatives trading in India. One of the most notable changes is the elimination of daily expiries for index derivative contracts, replacing them with a weekly expiry system. This decision is rooted in SEBI's observation that daily expiry trading, particularly on the expiry day itself, tends to be highly speculative in nature, often characterized by short-term trading strategies and elevated volatility. By shifting to weekly expiries, SEBI seeks to curb this excessive speculation and promote a more measured and sustainable approach to derivatives trading.
In addition to the change in expiry frequency, SEBI has significantly increased the minimum trading amount for derivatives, raising it from the current range of Rs 5-10 lakhs to an initial Rs 15 lakhs, with plans to further increase it to between Rs 15 lakhs and Rs 20 lakhs. This move aims to ensure that only participants with sufficient financial capacity and risk tolerance engage in derivatives trading, thereby mitigating the potential for significant losses and market disruptions. Furthermore, SEBI has tripled the contract sizes for index derivatives, aligning them with the growth and evolution of the Indian market. The rationale behind this adjustment lies in the inherent leverage and risk associated with derivatives trading. By increasing contract sizes, SEBI aims to ensure that participants are taking on risks commensurate with their financial capabilities and risk appetite, thus contributing to market stability.
SEBI's commitment to investor protection is further evidenced by the introduction of a new extreme loss margin (ELM) requirement. This additional margin, levied at a rate of 2%, will be collected from investors to provide a buffer against extreme market events, known as tail risks. The additional ELM will be applicable to all open short options positions at the beginning of the trading day, as well as to short option contracts initiated during the day that are due to expire on that day. This measure is designed to enhance market resilience and minimize the potential for cascading losses during volatile market periods.
Other significant changes introduced by SEBI include the upfront collection of option premiums from buyers and the removal of calendar spread treatment on the expiry day. The upfront collection of premiums aims to prevent undue intraday leverage and discourage the practice of exceeding collateral limits by end-clients. The elimination of calendar spread treatment on the expiry day is driven by the recognition that the value of a contract expiring on that day can diverge significantly from the value of similar contracts expiring in the future. SEBI's decision to monitor position limits intraday, rather than just at the end of each day, reflects its determination to ensure compliance with established limits and prevent undetected intraday positions that could lead to market disruptions.