What are the SEBI’s new rules for Futures and Options?
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The Securities and Exchange Board of India (SEBI) has recently implemented significant changes to Futures and Options (F&O) trading in response to growing concerns over rampant speculation and financial losses among individual traders. With a staggering 93% of F&O traders reporting losses between FY22 and FY24, SEBI is stepping in to create a safer trading environment. One of the most notable changes is the restriction on weekly options trading. Currently, traders can engage in weekly options on multiple indices such as Nifty, Bank Nifty, and Sensex. Under the new regulations, SEBI plans to limit weekly options to just one major index per exchange. For instance, the National Stock Exchange (NSE) might allow weekly options exclusively on Bank Nifty or Nifty; the Bombay Stock Exchange (BSE) may offer them solely on Sensex or Bankex. This shift aims to curtail the high-frequency trading and speculative bets that come with multiple weekly options, which can lead to increased volatility and risk for individual traders.
Currently, traders holding calendar spreads—where they buy and sell options on the same underlying asset with different expiry dates—enjoy margin benefits even on expiry day. However, starting February 2025, SEBI will eliminate this benefit on expiry day, requiring traders to maintain full margins. For example, if a trader has a short option with a margin of INR 1 lakh and a hedged long option, they currently only need to hold INR 50,000. On expiry day, however, they will need to keep the entire INR 1 lakh in margin to cover potential volatility. To further manage risk, SEBI is introducing an additional 2% Extreme Loss Margin (ELM) on all short options positions on expiry day, effective November 2024. This applies to both pre-existing and newly created positions. For instance, a trader with a short position in a Nifty call option expiring on a specific day will need to add this 2% margin to their existing margin requirements. This move is intended to buffer against sudden market movements, which are often pronounced on expiry days.
The minimum contract size for index derivatives will be increased from the current range of INR 5 lakh to INR 10 lakh, to a new range of INR 15 lakh to INR 20 lakh starting in November 2024. This adjustment is designed to ensure that only experienced and well-capitalized traders participate in the derivatives market, reducing the likelihood of smaller retail investors overextending themselves. Currently, position limits—maximum exposure allowed in a contract—are checked only at the end of the trading day. Starting in April 2025, SEBI will implement intraday monitoring, taking multiple snapshots during the trading day to ensure traders do not exceed their limits at any point. This measure aims to provide real-time oversight and prevent excessive risk-taking. Finally, SEBI will now require traders to pay the full premium upfront when buying options, eliminating the previous practice of allowing payment at the end of the day. This change is aimed at preventing traders from relying on borrowed money or leveraging their positions further in an already high-risk environment.
SEBI's new rules reflect a proactive approach to mitigating the risks associated with F&O trading in India. By implementing measures to limit speculative trading, increase margins, and ensure responsible trading practices, SEBI is taking significant steps to protect individual investors and promote a more stable trading environment. While these changes may impose additional challenges for traders, they are ultimately designed to foster a healthier market ecosystem and reduce the financial strain on individual traders. As the market adapts to these new regulations, it will be crucial for traders to stay informed and adjust their strategies accordingly.
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