Today, SEBI released the circular providing a framework to strengthen Equity Index Derivatives to increase Investor Protection and Market Stability. Refer to the Circular for details.
The Circular aims to curb the heightened Trading Volumes in Index Derivatives. According to SEBI Press Release, 93% of Individual Traders Incurred Losses in Equity F&O between FY22 and FY24; Aggregate Losses Exceeded ₹ 1.8 Lakh Crores Over Three Years.
The summary of SEBI’s circular is given herewith:
1. Upfront Collection of Option Premium
Provision: Trading Members (TMs) and Clearing Members (CMs) must collect the option premium upfront from buyers.
Rationale: To prevent undue intraday leverage.
Effective From: February 01, 2025.
2. Removal of Calendar Spread Treatment on Expiry Day
Provision: No offsetting positions across different expiries will be allowed on the expiry day.
Rationale: To manage significant basis risk on expiry day.
Effective From: February 01, 2025.
3. Intraday Monitoring of Position Limits
Provision: Stock Exchanges will monitor position limits for index derivatives intraday.
Rationale: To prevent undetected intraday breaches of permissible limits, especially on expiry days.
Effective From: April 01, 2025.
4. Contract Size for Index Derivatives
Provision: Minimum contract size to be increased to a value not less than ₹15 lakhs, with a value cap of ₹20 lakhs.
Rationale: To ensure the suitability and appropriateness of index derivatives for participants.
Effective From: November 20, 2024 (for new contracts).
5. Rationalization of Weekly Index Derivatives Products
Provision: Each exchange can offer derivatives contracts with weekly expiry for only one benchmark index.
Rationale: To reduce excessive speculative trading on expiry days.
Effective From: November 20, 2024.
6. Increase in Tail Risk Coverage on Options Expiry Day
Provision: An additional Extreme Loss Margin (ELM) of 2% will apply to short options contracts on expiry day.
Rationale: To enhance coverage against heightened speculative activity.
Effective From: November 20, 2024.