SEBI tightens norms for equity derivatives trading

The Securities and Exchange Board of India (SEBI) has implemented a series of new regulations aimed at curbing speculative activity and protecting retail investors in the equity derivatives market.

These measures, which will come into effect in phases starting 20 November 2024, include:

* Increased Contract Size: The minimum contract size for index futures and index options will be raised to Rs 15 lakh from the current range of Rs 5 lakh to Rs 10 lakh. This is expected to deter smaller investors and reduce speculative activity.

* Rationalization of Weekly Products: Each exchange will be allowed to offer weekly expiry contracts for only one of its benchmark indices. This is expected to simplify the market and mitigate risks associated with excessive trading on expiry days.

* Upfront Premium Collection: Options buyers will be required to pay the full premium upfront. This is likely to reduce the risk of default by options buyers and ensure that exchanges have sufficient funds to settle contracts.

* Intraday Monitoring: Exchanges will monitor position limits for index derivatives intraday to prevent excessive leverage, especially on expiry days. This will help prevent excessive leverage and reduce the risk of market manipulation.

* Increased Tail Risk Coverage: A higher Extreme Loss Margin (ELM) of 2% will be levied on short options contracts. This will protect against extreme market events and reduce the risk of systemic failures.

* Removal of Calendar Spread Treatment: The tax benefit for calendar spreads will be removed on the expiry day. This will eliminate a tax advantage for certain trading strategies, potentially affecting their profitability.

Upfront collection of option premium from buyers and the removal of calendar spread treatment on the expiry day will both take effect on 1 February 2025. Intraday monitoring of position limits will begin on 1 April 2025. The contract size for index derivatives, the rationalization of Weekly Index derivatives products, and the increase in tail risk coverage on the day of options expiry will all be implemented on 20 November 2024.

These measures are intended to strengthen the equity index derivatives market, enhance investor protection, and maintain market stability. SEBI has expressed concerns about the surge in F&O trading volumes and the potential risks associated with excessive speculation.

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