The Securities and Exchange Board of India (Sebi) on Tuesday announced six key changes to the derivatives trading framework to prevent excessive speculative activity amid concerns around mounting losses of individual traders.
These measures include increasing the contract size to Rs 15 lakh from the current Rs 5 lakh, raising margin requirements, upfront collection of option premiums from buyers, limiting weekly expiries to one benchmark per exchange, intraday monitoring of position limits, and removing calendar spread treatment on the expiry day.
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As per a study by the market regulator, over 93 per cent of retail traders incurred losses in the F&O segment in the last three financial years, with total losses amounting to Rs 1.8 trillion.
Several financial regulators and participants, including the Reserve Bank of India (RBI) and the Chief Economic Advisor, had raised concerns over household losses in the speculative segment, which has breached an average daily turnover of Rs 500 trillion. Following these concerns, Sebi floated a consultation paper in July on the proposed measures, which were later discussed by an expert working group and the secondary market advisory committee.
The measures announced by Sebi on Tuesday, aimed at raising the entry barrier for retail participation, will be implemented in a phased manner, with three of the six changes being made effective from November 20.
“It has been decided that a derivative contract shall have a value not less than Rs 15 lakh at the time of its introduction in the market. Further, the lot size shall be fixed in such a manner that the contract value of the derivative on the day of review is within Rs 15 lakh to Rs 20 lakh,” said Sebi in the circular.
This is the first revision in the contract size in the last nine years.
On limiting weekly expiries per exchange to one benchmark, Sebi noted that hyperactive trading in index options on expiry day had implications for investor protection and market stability, with no discernible benefit towards capital formation.
The change implies that the National Stock Exchange (NSE) might only retain weekly expiries of Nifty, while its peer BSE may hold weekly expiries of only Sensex—removing the current trend of one expiry each day.
The market watchdog has further decided to levy an additional Extreme Loss Margin (ELM) of 2 per cent for short options contracts effective November 20.
“This would be applicable for all open short options at the start of the day, as well as on short options contracts initiated during the day that are due for expiry on that day. For instance, if the weekly expiry on an index contract is on the 7th of the month and other weekly/monthly expiries on the index are on the 14th, 21st, and 28th, then for all the options contracts expiring on the 7th, there would be an additional ELM of 2 per cent on the 7th,” noted Sebi.
The market watchdog has further mandated brokers (trading members) to collect option premiums upfront from option buyers in a bid to avoid undue intraday leverage and discourage the practice of allowing any position beyond the collateral at the trader level.
Additionally, Sebi has directed stock exchanges to monitor position limits for equity index derivatives on an intraday basis. Position limits refer to predefined levels to limit the number of shares or derivative contracts a trader can own during a day. These are used to prevent large traders from manipulating the market. The mandate on exchanges will be effective from April 2025.
However, the proposal on the rationalisation of option strikes did not make it to the final circular.
Sebi officials had earlier indicated that the changes are short-term measures, and more steps to curb speculation may be formulated later.
Earlier, the market regulator also revised the eligibility criteria for stock selection in F&O.
