All you need to know about Sebi’s proposals on index derivatives
The Securities and Exchange Board of India (Sebi) on Tuesday issued a consultation paper on measures to strengthen the framework for index derivatives (futures and options) to better protect investors and enhance market stability.
The aim of the proposed measures is to enhance investor protection and promote the stability of derivatives markets, while ensuring sustainable capital formation.
Here’s everything you need to know about the measures proposed by the Sebi, how they will impact derivatives/(F&O) traders and what experts think about them.
These are the SEVEN key proposals of Sebi in the F&O consultation document?
1. Rationalization of the exercise price for options
Existing practice: Nifty and Bank Nifty option strikes cover about 7-8 percent of the index movement on the given day, with additional strikes if the situation demands. Nifty has a maximum of 70 option strikes in total, while Bank Nifty has about 90.
Suggested: No more than 50 strikes are introduced at the time of launching the contract. Strike interval should be uniformly close to the prevailing price (around 4 percent) and can increase to 8 percent if necessary.
2. Pre-collection of option premium
Existing practice: There is a provision to collect margin for futures positions, both on the long and sell side; and short options positions. However, there is no provision for collecting option premium up front from the option buyer.
Suggested: Collect option premiums in advance.
3. Elimination of calendar spread benefit on maturity date
Existing practice: Calendar spread margin is applicable on the expiry date for two F&O positions with different expiry dates as compared to two normal F&O positions. This helps in significantly reducing the margin requirement.
Proposal: No calendar spread margin for contracts expiring on the same day.
4. Intraday position limit monitoring
Existing practice: Limits are monitored at the end of the day by MII’s (Clearing Corporations/ Stock Exchanges)
Suggested: Position limits for index derivatives should be monitored on an intraday basis, with an appropriate short-term fix and a glide path for full implementation.
5. Minimum contract size
Existing practice: In 2015, a minimum contract size of Rs 5 – Rs 10 lakh was fixed.
Suggested: In Phase 1, the minimum contract size at the time of launch should be between Rs 15 and Rs 20 lakh. Phase 2, after 6 months, proposes to implement a minimum contract size of Rs 20 to Rs 30 lakh.
6. Rationalization of weekly index products
Existing practice: The weekly expiration of index derivatives has resulted in one expiration occurring every day of the week on all indices/exchanges.
Suggested: Weekly expiration for 1 benchmark index per exchange.
7. Margin increase near contract expiry
Existing practice: No additional margin is required in the last two trading days before expiration.
Suggested: Additional 3 percent Extreme Loss Margin (ELM) to be collected at the beginning of the penultimate day of the contract expiry. On the last day ELM is increased to 5 percent.
Why has Sebi proposed these measures?
Releasing the consultation paper, Sebi chief Mahabai Puri Buch said an annual loss of Rs 50,000-Rs 60,000 crore in household savings due to derivatives trading is a macro issue. The same money could be deployed for IPOs, mutual funds or other productive uses for the Indian economy.
Sebi believes that there is excessive speculative trading activity in F&O. NSE data shows that retail investors alone account for about 50 per cent of the trading volumes in index derivatives, ahead of proprietary traders, foreign investors and domestic institutional investors.
According to Sebi, the cumulative trading loss of 9.25 million unique individuals and retail traders in NSE’s index derivatives amounted to Rs 51,689 crore in FY24.
What happens now?
By publishing this consultation paper, Sebi has invited the public to send comments and suggestions from other interested stakeholders along with supporting arguments through the web portal or via email, by August 20, 2024.
What do experts say?
Dhiraj RelliHDFC Securities MD & CEO feels that the measures announced by Sebi are aimed at controlling the glut of equity derivatives. The proposal to rationalise weekly expiry will impact trading volumes.
“One of the proposals is to rationalise weekly expiry and reduce it to one per week on the benchmark index per Exchange. This change is likely to have an impact on volumes as recent volumes in the equity derivatives segment have been driven by weekly expiry,” Dhiraj Relli said in a note.
These may not be the only interventions by the regulator. We may see more measures including product suitability, customer level certification, etc. With the rescheduling of Exchange transaction charges, higher STT introduced in the Budget and the proposed regulatory framework, it is expected that there may be rationalisation in Equity Derivatives volumes, Dhiraj added.
Meanwhile, a foreign investment company Jefferies believes that the Sebi proposals may have a diverse impact on market players, with stock exchanges and retail brokers set to be the worst hit.
First print: Jul 31, 2024 | 09:41 AM IST