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The Securities and Exchange Board of India (SEBI) has implemented significant changes to the futures and options (F&O) market, impacting traders' margin requirements and contract sizes. These changes, rolled out in phases, aim to curb excessive speculation and enhance market stability. The initial phase, commencing on Wednesday, saw the introduction of a 2% extreme loss margin (ELM) for Nifty 50 expiry contracts, affecting traders immediately. This ELM, an additional margin charged by exchanges beyond standard requirements, significantly alters the cost of trading, particularly for those holding positions on expiry days. The impact on out-of-the-money (OTM) options is particularly pronounced, with margin requirements increasing substantially. For instance, an OTM strike might see a 35% jump in margin requirements, whereas in-the-money (ITM) strikes may experience a smaller increase. This shift requires traders to carefully manage their positions and account balances to avoid margin calls.
Beyond the immediate impact of the ELM, the SEBI reforms involve a significant increase in contract sizes for index derivatives. While existing contracts retain their current lot sizes until expiration, new contracts introduced will feature minimum lot sizes substantially larger, increasing the capital required for participation. For example, the Nifty 50 weekly contract will see its lot size increase from 25 to 75. This escalation in lot size affects all new contracts, including weekly, monthly, quarterly, and half-yearly ones. The increase is intended to reduce the overall volume of speculative activity, making it less attractive for smaller traders and potentially creating greater stability. The implementation of these larger lot sizes is staggered, with quarterly and half-yearly contracts for Nifty, Bank Nifty, and Sensex seeing the change implemented on specific dates in late December. This phased approach allows for a more gradual adjustment for the market.
The rationalization of weekly expiries is another key aspect of SEBI's plan. Previously, multiple weekly contracts existed across various indices. Now, only one weekly contract for Nifty 50 on the NSE and one for the Sensex on the BSE will be available. This consolidation aims to simplify trading and reduce the complexity of managing multiple expirations. The move should also contribute to reducing volatility and speculation, as traders will concentrate their efforts on a single, unified expiry date. The impact of this change is directly seen in the adjustments traders need to make to their trading strategies and portfolio management. It necessitates a focus on efficient risk management and close monitoring of positions.
Further phases of SEBI’s reforms are scheduled for future implementation. These include the upfront collection of options premiums from buyers, eliminating a specific trading strategy advantage, and the introduction of mandatory intraday monitoring of position limits. These measures collectively intend to create a more transparent, stable, and regulated F&O market. The final piece of the puzzle, intraday position limit monitoring, won't come into effect until April 1, 2025, allowing time for market participants to adapt to the initial changes. However, the immediate changes already implemented demonstrate SEBI’s proactive stance in managing the inherent risks of the derivatives market.
The reactions from market participants are mixed. While some traders appreciate the effort to reduce speculation and enhance stability, others express concerns about the increased capital requirements and potential impact on their trading strategies. The increased margins, especially for OTM options, could significantly impact hedging strategies and profitability. Experts emphasize the need for traders to adapt to the new rules, accurately estimate margin requirements, and adjust trading plans accordingly. The shift necessitates more sophisticated risk management and a deeper understanding of the new margin calculations. The impact of these changes will be carefully observed in the coming months, allowing SEBI to assess their effectiveness and make any necessary adjustments in future iterations of its regulatory framework. The ultimate goal is to strike a balance between allowing healthy market activity and preventing excessive speculation that can lead to market instability.
Source: F&O revamp: Traders brace for higher margins, lot sizes