Sebi chief Madhabai Puri Buch said an annual loss of Rs 50,000 – Rs 60,000 crore of household savings through derivatives trading is a macro concern. The same money could get deployed into IPOs, mutual funds, or other productive uses for the Indian economy.
The Sebi believes there is excessive speculative trading activity taking place in F&O, as the NSE data shows that retail investors alone account for around 50 percent of the trading volumes in index derivatives, leaving behind proprietorship traders, foreign investors, and domestic institutional investors.
As per Sebi, the cumulative trading loss incurred by 9.25 million unique individuals and proprietorship traders in the index derivatives of NSE alone stood at Rs 51,689 Crores in FY24
In the Union Budget 2024-25 Finance Minister Nirmala Sitharaman proposed to increase the rates of STT on the sale of an option in securities from 0.0625% to 0.1% of the option premium and on the sale of a futures in securities from 0.0125% to 0.02% of the price at which such futures are traded, thereby making it costlier to trade in F&O
To safeguard retail investors, who have faced significant losses in the derivatives market, By curbing excessive speculation and promoting a more stable trading environment, the SEBI has announced seven proposals that are expected to help retail investors make more informed and less risky trading decisions.
Listed below are the seven key Sebi proposals in the F&O consultation paper
1) Rationalisation of options strikes
Existing Practice:- Nifty has a total of up to 70 options strikes, while Bank Nifty around 90 and they cover roughly 7-8 per cent of index movement on the given day, with additional strikes introduced if the situation warrants so.
Proposed:- Sebi has proposed rationalizing the existing strike price introduction methodology. Strike interval to be uniform near the prevailing index price (4% around the prevailing price) and the interval to increase as the strikes move away from the prevailing price (around 4% to 8%)
Not more than 50 strikes are to be introduced for index derivatives contracts at the time of contract launch and New strikes are to be introduced to comply with the aforesaid requirement on a daily basis
2) Upfront collection of options premium
Existing:- There is a stipulation to collect margin for futures positions both on the long and sell side; and short positions in options. However, there is no explicit stipulation of upfront collection of options premiums from the buyer of the option.
Proposed:- In order to avoid any undue intraday leverage to end clients and to discourage any market-wide practice of allowing position beyond the collateral at the end client level, it is desirable to mandate the collection of options premium upfront from the buyer of the option.
3) Removal of calendar spread benefit on expiry day
Existing:- Margin requirement for an F&O position reduces significantly by offsetting position on a future expiry as the calendar spread margin applies on such position instead of the normal margin on two positions.
Proposed:- Given the skew in volumes witnessed on the expiry day vis-à-vis other non-expiry days and the inherent basis and liquidity risk present therewith, the margin benefit for calendar spread position would not be provided for positions involving any of the contract expiring on the same day.
As there is a significant amount of speculative trading even minutes before the expiry of options, the removal of the calendar spread benefit on expiry day is likely to enhance overall risk posture.
4) Intraday monitoring of position limits
Existing: The positionn limits for various participants and product types are monitored by Clearing Corporations/Stock Exchanges at the end of the day. So Particularly on the day of expiry, there is a possibility of undetected intraday positions beyond permissible limits as end of day open positions would be NIL.
Proposed:- Given the evolving market structure, the position limits for index derivative contracts shall also be monitored by the clearing corporations/stock exchanges on an intraday basis, with an appropriate short-term fix, and a glide path for full implementation, given the need for corresponding technology changes.
5) Minimum contract size
Existing: The minimum contract size requirement for derivative contracts last set in 2015was Rs. 5 Lakhs to Rs. 10 Lakhs.
Proposed:- The minimum value of the derivatives contract should be increased from Rs 5-10 lakh to Rs 15-20 lakh in the first phase and Rs 20-30 lakh in the second phase after 6 months
Given the inherently higher risk in derivatives and a large amount of implicit leverage, an increase in minimum contract size would result in reverse sachetization of such risk-bearing products.
6) Rationalising of Weekly options
Existing:-
The index derivatives contracts are offered by stock exchanges in weekly and monthly expiries and the expiry of such weekly contracts on all five trading days of the week across different indices/exchanges construct resulting in speculative money moving from one expiry of an index to another every single day
Proposed:- Given there is an expiry of weekly contracts on all five trading days of the week, the regulator has proposed that weekly options contracts should be provided on a single benchmark index of an exchange.
7) Increase in margin near contract expiry
Existing:- No additional margin is required in the last two trading days of the expiry.
Coming to the issue during Near expiry the premium traded decreases thereby creating higher risk on a notional basis for entities dealing in options and additional buffers are required
Proposed:- To address the issue of high implicit leverage in options contracts near expiry, creating a high risk on a notional basis for entities dealing in options, Sebi said Extreme Loss Margin (ELM) should be increased by 3 percent at the start of the day before expiry and an increase of 5 percent at the start of expiry day.
Brokerage Views
As per sources, Following the above proposals for saving retail investors, Foreign Institutional brokerage firm Jefferies said “Exchanges and retail-focused brokers will be most impacted. The highest impact can come from the reduction in the number of weekly option contracts
In continuation, Jefferies believes that SEBI’s new proposed rules will directly impact nearly 30 -40 percent of F&O volumes, with significant consequences for exchanges and retail-focused brokers due to the tightening of the derivatives market. For BSE, Jefferies anticipates that the removal of the Bankex weekly contract could reduce EPS by 7-9 percent over FY25-27.
However, Jefferies also suggests that gains from the spillover of trading activity from discontinued products could offset BSE’s EPS impact and, in the event of a moderate industry-wide impact of SEBI measures, potentially drive EPS upgrades.
IIFL Securities sees a higher impact for NSE as options account for 60 percent of its revenues, while for BSE it is 40 percent. IIFL Securities estimates a 25-30 percent impact on NSEFY26 earnings and 15-18 percent for BSE.
Written by: Bharath K.S
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