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The Securities and Exchange Board of India (SEBI) has announced a six-pronged framework aimed at curbing the growing addiction to futures and options (F&O) trading among Indian investors. This comprehensive approach, based on recommendations from an Expert Working Group (EWG), seeks to address the heightened risks associated with derivatives trading and promote investor protection.
At the heart of SEBI's initiative lies the objective of mitigating excessive leverage, a key factor contributing to the allure of F&O trading for retail investors. The regulatory body plans to implement a mandatory upfront collection of options premium from buyers, effective from February 1, 2025. This move aims to eliminate undue intraday leverage and discourage practices that allow positions exceeding collateral levels at the client level. The upfront margin collection will also encompass the net options premium payable at the client level.
Another significant change introduced by SEBI pertains to the treatment of calendar spreads, a strategy used to profit from price differences between contracts expiring on different dates. Effective from February 1, 2025, the benefit of offsetting positions across different expiries through calendar spreads will be nullified on the day of expiry for contracts expiring on that day. This change aligns calendar spread treatment with the cross-margin framework applied to correlated indices with different expiries, where the cross-margin benefit is fully revoked at the commencement of the first expiring index.
SEBI's proactive approach also involves bolstering intraday monitoring of position limits for equity index derivatives, with the aim of preventing the creation of positions exceeding permissible limits, particularly on expiry days characterized by high volumes. To facilitate this, stock exchanges will be mandated to conduct a minimum of four position snapshots throughout the trading day. The specific number of snapshots may be determined by the respective exchanges, subject to a minimum of four per day. This measure will be effective for equity index derivatives contracts from April 1, 2025.
Recognizing the inherent leverage and higher risk associated with derivatives, SEBI has significantly increased the minimum contract size for index futures and options, effective from November 20, 2024. The contract size has been raised from the current Rs 5-10 lakh to Rs 15 lakh at the time of introduction. Further, the lot size will be adjusted to ensure that the contract value of the derivative falls within the range of Rs 15 lakh to Rs 20 lakh on the day of review. This recalibration, in line with the growth of the market, aims to ensure that built-in suitability and appropriateness criteria are maintained for participants.
SEBI has also sought to address the phenomenon of one-expiry-a-day, which has fueled speculative activity in the market. To this end, the regulator has rationalized index derivatives products offered by exchanges that expire on a weekly basis. Effective from November 20, 2024, weekly derivatives contracts will only be available on one benchmark index per exchange. This means that the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) will have to choose one index derivative product each for weekly expiry contracts.
In response to the heightened speculative activity around options positions and the attendant risks, SEBI has decided to increase the tail risk coverage by imposing an additional extreme loss margin (ELM) of 2% on short options contracts. This ELM will apply to all open short options at the start of the day, as well as to short options contracts initiated during the day that are due to expire on that day. For instance, if a weekly expiry on an index contract falls on the 7th of the month and other weekly/monthly expiries on the index are on the 14th, 21st, and 28th, then an additional ELM of 2% will be levied on the 7th for all options contracts expiring on that date.
SEBI's decision to implement these measures stems from its study, which revealed that 1.13 crore retail F&O traders incurred a combined net loss of Rs 1.81 lakh crore over the past three financial years (FY22-FY24). The study also found that only 7.2% of individual F&O traders made a profit during this period. Notably, the number of retail traders on the Dalal Street has almost doubled in two years, rising from approximately 51 lakh in FY22 to about 96 lakh in FY24. Regulators are concerned that household savings are being misdirected towards gambling in the F&O segment. SEBI's six-step framework, therefore, represents a significant step towards protecting investors and fostering a more responsible and sustainable F&O trading environment in India.
Source: Sebi announces 6-step framework to get Indians rid of F&O addiction