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The Securities and Exchange Board of India (SEBI), the regulatory body overseeing India's securities market, has put forth a proposal aimed at streamlining the expiry day for equity derivatives products traded on stock exchanges. This move signifies a potential shift in the landscape of derivative trading, designed to enhance predictability and stability for market participants. The core of the proposal involves restricting the final settlement day, or expiry day, of these derivatives contracts to either Tuesday or Thursday. This change is intended to create a more structured and consistent environment for trading activities surrounding expiry dates, mitigating potential disruptions and fostering greater investor confidence. The consultation paper released by SEBI outlines the specifics of the proposed changes. Under the new framework, all equity derivatives contracts listed on an exchange would be uniformly limited to expiring on either a Tuesday or a Thursday. This uniformity is a significant departure from the current system, where exchanges have more flexibility in determining expiry days, leading to a potential proliferation of expiry events throughout the week. However, recognizing the need for some degree of flexibility and product differentiation, SEBI has proposed an exception: each exchange will be permitted to offer one weekly benchmark index options contract, allowing them to choose either Tuesday or Thursday as the expiry day for this particular product. This allows exchanges to cater to specific market demands and maintain a competitive edge in the benchmark index options segment. Beyond the benchmark index options, all other equity derivatives contracts, including benchmark index futures, non-benchmark index futures and options, and single stock futures and options, will be offered with a minimum tenor of one month. The expiry for these contracts will occur in the last week of each month, aligning with the chosen day – either the last Tuesday or the last Thursday – designated by the exchange. This standardization of expiry days across different types of equity derivatives contracts aims to reduce complexity and enhance clarity for investors. Furthermore, SEBI has stipulated that exchanges will need to obtain prior approval from the regulatory body before launching or modifying any contract expiry or settlement day. This measure is intended to ensure that any changes to the expiry calendar are carefully considered and aligned with the overall objectives of market stability and investor protection. The current system for equity derivatives contracts allows for a greater degree of flexibility. While contracts are generally launched with a minimum tenure of one month, an exception exists for options contracts on a single benchmark index per exchange, where weekly expiries are permitted. The specific details of these weekly options contracts, including the choice of expiry day, are currently left to the discretion of the respective stock exchanges. This has led to a situation where different exchanges have adopted different expiry days for similar products, potentially creating confusion and arbitrage opportunities for market participants. Currently, the two major exchanges in India's equity derivatives market, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), have chosen Tuesday and Thursday, respectively, as the expiry days for derivatives contracts on single stocks and indices. This means that contracts on BSE typically expire on Tuesdays, while those on NSE expire on Thursdays. In addition, monthly single stock derivatives contracts on one of the exchanges expire mid-month, adding another layer of complexity to the expiry calendar. Monthly index derivatives contracts, on the other hand, expire in the last week of the month for each exchange. The NSE had previously announced its intention to revise the expiry day of index and stock derivatives contracts to Monday from Thursday, effective April 4. This move was aimed at potentially attracting more trading volume and enhancing its competitive position. However, in light of SEBI's consultation paper, the exchange has decided to defer the implementation of this change, indicating a willingness to cooperate with the regulatory body and align its practices with the proposed new framework. SEBI has articulated its rationale for the proposed changes in the consultation paper. The regulatory body believes that spacing out expiry days throughout the week can help reduce concentration risk and provide exchanges with an opportunity to differentiate their product offerings to market participants. This suggests that SEBI is aiming to strike a balance between standardization and competition, allowing exchanges to maintain some level of autonomy while promoting a more orderly and less volatile trading environment. However, SEBI also recognizes that having too many expiry days can lead to a resurgence of expiry day hyperactivity, which could potentially jeopardize investor protection and market stability. Expiry day hyperactivity refers to the increased trading volume and volatility that often occur on the day that a derivatives contract expires, as market participants rush to close out positions or roll them over to new contracts. This increased activity can create opportunities for manipulation and potentially harm unsophisticated investors. Therefore, SEBI's proposal is designed to optimize the number of expiry days, striking a balance between providing sufficient trading opportunities and minimizing the risk of market disruptions. According to SEBI, the formalization of the final settlement days for equity derivatives contracts across exchanges will provide greater predictability to market participants. This predictability will help investors plan their trading strategies more effectively and avoid any unwarranted shuffling of expiry days that could potentially impact market integrity or orderly trading. The proposal is expected to reduce concentration risk by ideally spacing out expiry days while optimizing their number. This provides room for product innovation and risk management, thereby ensuring investor protection and market stability. Puneet Sharma, CEO and Fund Manager at Whitespace Alpha, a multi-asset class asset management firm, expressed a nuanced perspective on SEBI's proposal. While appreciating SEBI's efforts to enhance market predictability and stability, Sharma highlighted the potential implications for Alternative Investment Funds (AIFs) that actively utilize derivatives for alpha generation and hedging. He emphasized that the proposed move towards a uniform expiry day and primarily monthly expiries warrants careful consideration for AIFs. Sharma acknowledged that a streamlined expiry structure could reduce systemic risk but stressed the importance of ensuring that the chosen expiry days align with market realities and do not unduly restrict the diverse trading strategies employed by Category III AIFs. He further emphasized that maintaining sufficient flexibility in expiry tenors and ensuring ample liquidity across all available contracts, particularly the proposed monthly expiries, will be vital for the continued efficiency of risk management and alpha generation strategies.
This is the second paragraph. The proposal put forth by the Securities and Exchange Board of India (SEBI) to streamline the expiry days of equity derivatives marks a significant step towards enhancing market stability and investor protection. The current system, with its varying expiry dates across different exchanges and contract types, can lead to complexity and confusion for market participants. By limiting the expiry days to either Tuesday or Thursday, SEBI aims to create a more predictable and transparent trading environment. This standardization can help reduce the potential for market manipulation and ensure that investors have a clearer understanding of the risks involved in trading derivatives. The exception granted for weekly benchmark index options allows exchanges to maintain some degree of flexibility and cater to specific market demands. However, the primary focus of the proposal is to promote a more orderly and less volatile trading environment for the majority of equity derivatives contracts. The move to monthly expiries for most contracts is also a significant change, as it may impact the trading strategies employed by various market participants. While this may reduce the frequency of expiry day hyperactivity, it could also limit the opportunities for short-term trading and hedging. It is crucial for SEBI to carefully consider the potential impact of these changes on different types of investors and market participants, ensuring that the new framework does not unduly disadvantage any particular group. The comments from Puneet Sharma of Whitespace Alpha highlight the concerns of AIFs that actively utilize derivatives for alpha generation and hedging. These firms rely on a diverse range of trading strategies that may require greater flexibility in expiry tenors. The proposed changes could potentially restrict their ability to effectively manage risk and generate returns. SEBI should engage in a thorough consultation process with AIFs and other market participants to address these concerns and ensure that the final framework is well-suited to the needs of the market. In addition to the expiry day changes, SEBI's requirement for exchanges to obtain prior approval for any modifications to contract expiry or settlement days is a positive step. This measure will help ensure that any changes are carefully considered and aligned with the overall objectives of market stability and investor protection. It will also allow SEBI to maintain greater oversight of the derivatives market and prevent exchanges from making changes that could potentially harm investors or disrupt the market. Overall, SEBI's proposal to streamline the expiry days of equity derivatives is a well-intentioned effort to enhance market stability and investor protection. However, it is crucial for SEBI to carefully consider the potential impact of these changes on different types of investors and market participants, ensuring that the final framework is well-suited to the needs of the market and does not unduly restrict legitimate trading strategies. A thorough consultation process with all stakeholders is essential to ensure that the new framework is effective and beneficial for the long-term health of the Indian derivatives market. Further, the emphasis should be on ensuring sufficient liquidity across all contracts, especially the monthly expiries that are being proposed. Insufficient liquidity will hamper price discovery, increase transaction costs, and may force market participants to use less efficient hedging strategies. Therefore, liquidity will be a critical factor for the success of this proposal. SEBI needs to be vigilant in monitoring liquidity across contracts and make appropriate amendments if necessary. Ultimately, the goal should be a more robust, efficient, and transparent derivatives market that fosters confidence among both domestic and international investors. This will require ongoing dialogue, careful analysis, and a willingness to adapt the regulatory framework as needed to meet the evolving needs of the market.
This is the third paragraph. In conclusion, the Securities and Exchange Board of India's (SEBI) proposed streamlining of equity derivatives expiry days represents a significant regulatory intervention aimed at fostering market stability and enhancing investor protection within the Indian financial landscape. The initiative, centered around restricting expiry days to either Tuesday or Thursday, seeks to address inherent complexities and potential vulnerabilities associated with the existing, more fragmented system. While the core objective of predictability and reduced concentration risk is commendable, the proposal necessitates a holistic evaluation of its potential impacts on diverse market participants and their respective trading strategies. The current framework, characterized by varying expiry dates across different exchanges and contract types, has arguably contributed to market dynamism and arbitrage opportunities. However, it has also presented challenges in terms of transparency and potential for manipulative practices, particularly around expiry dates. SEBI's proposed solution aims to strike a balance by standardizing expiry days, thereby simplifying the trading landscape and reducing the scope for unwarranted market volatility. The allowance for a weekly benchmark index option contract on each exchange provides a degree of flexibility, enabling exchanges to differentiate their offerings and cater to specific investor preferences. However, the shift towards predominantly monthly expiries for other derivatives contracts warrants careful consideration, as it may influence trading frequency and hedging strategies employed by various market participants. Alternative Investment Funds (AIFs), as highlighted by Puneet Sharma, represent a crucial stakeholder group whose concerns must be addressed. AIFs often rely on sophisticated derivative strategies for alpha generation and risk management, and the proposed restrictions could potentially limit their operational flexibility and effectiveness. SEBI should prioritize open dialogue with AIFs and other relevant market participants to comprehensively understand their concerns and adapt the regulatory framework accordingly. Furthermore, the regulatory requirement for exchanges to seek prior approval for any changes to contract expiry or settlement days underscores SEBI's commitment to maintaining market oversight and preventing potentially disruptive alterations to the trading environment. This measure promotes responsible market conduct and ensures that any modifications are carefully vetted to safeguard investor interests. The success of SEBI's proposal hinges on a delicate balance between standardization, market efficiency, and investor protection. While predictability and reduced concentration risk are desirable outcomes, it is essential to avoid stifling innovation and legitimate trading strategies. Liquidity in all contracts, particularly the proposed monthly expiries, will be paramount. SEBI's continued monitoring and adaptability will be crucial in ensuring the long-term health and stability of the Indian derivatives market, fostering confidence among both domestic and international investors. The regulatory body must remain vigilant in identifying potential unintended consequences and be prepared to make necessary adjustments to the framework to optimize its effectiveness. In summary, SEBI's endeavor to streamline equity derivatives expiry days is a significant undertaking with the potential to reshape the Indian financial landscape. By prioritizing careful consideration of stakeholder concerns, maintaining a flexible approach, and continuously monitoring market dynamics, SEBI can create a more robust, transparent, and efficient derivatives market that benefits all participants. The overarching goal should be to foster a sustainable ecosystem that promotes investor confidence, encourages innovation, and contributes to the overall growth and stability of the Indian economy. This requires a commitment to ongoing dialogue, data-driven analysis, and a willingness to adapt the regulatory framework as needed to meet the evolving challenges and opportunities of the market.
Source: SEBI proposes to streamline expiry day for derivatives – How will it benefit investors?