SEBI’s New Guidelines for Derivative Trading

In a bid to regulate futures and options (F&O) SEBI has announced a new set of guidelines. As per the latest F&O rules, the derivative contract value cannot be less than Rs 15 lakh. In a notification SEBI says that all other stipulations for contract size of index derivatives shall remain unchanged.

The implementation of updated guidelines will occur in multiple stages, commencing on November 20 and from that day, new features such as index derivative contracts with weekly expiries, larger contract sizes, and enhanced protection against tail risks through the imposition of additional Extreme Loss Margin (ELM) will be introduced.

A SEBI study showed that individual traders made net losses totalling 1.81 trillion rupees in futures and options in the three years to March 2024, with only 7.2% making a profit. Bottom of Form

For the 12 months to March 30, 2024 retail investors made gross losses totalling 524 billion rupees but proprietary traders, acting on behalf of financial institutions, and foreign investors made gross profits of 330 billion rupees and 280 billion rupees, respectively. Exchanges and brokerage firms which have been the biggest beneficiary of India’s derivatives markets trading boom are considering changes in strategies to minimise the impact.

Some of the important measures are:

Contract size for index derivatives

With effect from November 20, 2024, Sebi has increased the minimum contract size for index futures and options from Rs 5-10 lakh currently to 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.

Intraday monitoring of position limits

Sebi had instructed stock exchanges to monitor existing position limits for equity index derivatives as there is a risk of positions being created beyond permissible limits amid huge volumes on expiry day. For this purpose, stock exchanges shall consider minimum 4 position snapshots during the day. To provide sufficient time for implementation, the measure shall be effective for equity index derivatives contracts from April 1, 2025.

Limiting weekly index expiry

To solve the problem of excessive trading in index derivatives on expiry day, it has been decided to rationalise index derivatives products offered by exchanges which expire on a weekly basis. With effect from November 20, 2024, weekly derivatives contracts would only be available on one benchmark index for each exchange. This means that BSE and NSE will have to choose one index derivative product each for weekly expiry contracts.

Upfront collection of Option premium

Options prices move in a non-linear way and carry very high implicit leverage. “In order to provide sufficient time to implement the aforesaid measure, this requirement would be applicable for equity derivatives segment from February 01, 2025,” SEBI said in a circular.

Increase in tail risk coverage

Sebi has decided to increase the tail risk coverage by levying an additional ELM (extreme loss margin) of 2% for short options contracts. This would be applicable for all open short options at the start of the day, as well on short options contracts initiated during the day that are due for expiry on that day.

Removal of calendar spread treatment

Given the relatively large volumes witnessed on the expiry day vis-à-vis future expiry days, and the enhanced basis risk that it represents, it has been decided that the benefit of offsetting positions across different expiries (‘calendar spread’) shall not be available on the day of expiry for contracts expiring on that day.