SEBI F&O Framework: Upfront Premium Collection, Position Monitoring, And Expiry Day Reforms Introduced

The Securities and Exchange Board of India on Tuesday has introduced a range of new measures under its F&O framework to strengthen the equity index derivatives market, focussing on investor protection and market stability. These measures stem from recommendations made by SEBI's Expert Working Group on derivatives and the Secondary Market Advisory Committee.

The changes included the mandatory upfront collection of option premiums from buyers, which will prevent undue intraday leverage. "It has been decided to mandate collection of options premium upfront from option buyers by the trading member or clearing member," the market regulator said in a circular. This requirement will take effect from February 2025.

Additionally, SEBI will remove calendar spread treatment on the expiry day of contracts, aiming to minimise basis risk on these high-volume trading days. This measure will also be effective from February 2025.

The market regulator's announcement came after its Monday board meeting, where it was expected to approve the recommendations of the expert working committee and secondary market advisory committee aimed at tightening regulations for retail individual derivative traders. The F&O Framework was not included in the Monday meeting.

NDTV Profit had exclusively reported earlier on Monday that the market regulator will be issuing circulars at the earliest and that the exchanges will start implementing in a phased manner.

SEBI in its Tuesday's circular highlighted that increased retail participation, short-tenure index options contracts, and heightened speculative trading volumes on expiry days have impacted the market.

Intraday Monitoring Of Position Limits

SEBI will implement intraday monitoring of position limits in equity index derivatives from April 2025 to combat speculative trading. Stock exchanges will randomly take at least four position snapshots during the day to ensure compliance with permissible limits, according to the circular.

Contract Size Recalibration

The minimum contract size for index derivatives will increase to Rs. 15 lakh from Nov. 20, the market regulator said. This change is intended to maintain participant suitability in light of the growing market.

Weekly Index Derivatives Rationalisation

The exchanges will only be allowed to offer weekly expiry derivatives contracts on one benchmark index, reducing speculative trading and volatility on expiry days. These rules will also come into effect on Nov. 20.