SEBI Moves To Control Excessive Speculation In F&O, Proposes Seven Measures

Sebi board meeting. (Source: NDTV Profit)

The Securities and Exchange Board of India has proposed new measures in a move to increase investor protection and market stability in the booming derivatives market, including mandating the upfront collection of options premiums from buyers by trading members and clearing members.

At present, there is no explicit requirement for upfront collection of options premiums from buyers, although margins are collected for futures positions and short options positions.

The market regulator is also mulling to revise the minimum contract size for index derivatives contract in a phased manner. The minimum value of derivatives contract at the time of introduction is proposed to be between Rs 15 lakh to Rs 20 lakh. After six months, the minimum value will be between Rs 20 lakh to Rs 30 lakh.

Currently, the minimum contract size requirement for derivative contracts is Rs 5 lakh to Rs 10 lakh, last set in 2015.

SEBI has also proposed to rationalise weekly index products by allowing weekly options contracts on only a single benchmark index of an exchange.

The consultation paper said that trading on expiry days is mostly speculative and often leads to high volatility, especially near the end of the day. With weekly contracts expiring on all trading days, this increased volatility and speculative activity result in poor outcomes for individual investors in the futures and options segment. Therefore, changes to the product offerings are needed.

SEBI's Seven Measures For F&O

The strike scheme for weekly/monthly index options contracts shall be based on the following principles:

Strike interval to be uniform up to a fixed percentage coverage near the prevailing index price, i.e., 4% around the prevailing index price.
Beyond the initial coverage threshold specified above, the strike interval is to be expanded so as to ensure that fewer strikes are introduced further away from the prevailing index price.
The number of strikes at the time of introduction was not more than 50.
New strikes are to be introduced to comply with the aforesaid requirement on a daily basis.

Members to collect option premiums on an upfront basis from the clients.

The margin benefit for calendar spread positions would not be provided for positions involving any of the contracts expiring on the same day.

The position limits for index derivative contracts shall be monitored by the clearing corporations and stock exchanges on an intraday basis, with an appropriate short-term fix and a glide path for full implementation.

Phase 1: The minimum value of the derivatives contract at the time of introduction is between Rs 15 lakh and Rs 20 lakh.
Phase 2: After six months, the minimum value of derivatives contracts will be between Rs 20 lakh and Rs 30 lakh.

Weekly options contracts are to be provided on a single benchmark index of an exchange.

At the start of the day before expiry, the Extreme Loss Margin is to be increased by 3%.
At the start of expiry day, ELM is to be further increased by 5%.

Expert Views

"The intention behind these proposed guardrails is to curb speculation, but I'm skeptical about their effectiveness. Increasing the market lot size could push traders towards 'dabba trading' or informal markets," said Deven Choksey, managing director of KRChoksey.

While talking to NDTV Profit, he mentioned that this might drive participants to focus more on small-cap and mid-cap stocks where liquidity is easier to manipulate.

This shift could lead to even more volatile valuations in those stocks. Essentially, while these measures might reduce speculation in the derivatives market, they may not address liquidity issues and could potentially worsen the situation in smaller stocks, Choksey said.

Referring to the new changes floated by SEBI, Moin Ladha, partner at Khaitan & Co., said that the intent is to protect the retail investors from overleveraging and discourage positions beyond collateral at the client level. The general approach seems to be more restrictive towards this investment avenue and greater monitoring is expected, he said.

Concerns Brew On F&O Boom

Recently, SEBI Chairperson Madhabi Puri Buch expressed concerns over the rapid growth in derivatives trading, highlighting potential broader economic implications.

The 2024 Economic Survey underscored this issue, revealing that derivatives, originally intended for hedging, are predominantly used for speculation globally, with India likely being no exception. The survey emphasised that derivatives trading can lead to significant gains, appealing to speculative instincts.

Further, RBI Governor Shaktikanta Das, in a recent address in Mumbai, highlighted the increasing gap between credit and deposit growth. He warned that this disparity could expose the financial system to liquidity challenges as household savings shift from traditional bank deposits to capital markets.

After regulatory concerns, the Union budget presented last week sought to increase the securities transaction tax on futures from 0.01% to 0.02% and the STT on options from 0.062% to 0.1%. Finance Minister Nirmala Sitharaman defended the hike, saying it is meant to indicate the high-risk nature of such markets to people, and not to raise revenue.