SEBI’s Proposed Changes to Enhance Investor Protection and Market Stability
The Securities and Exchange Board of India (SEBI) has unveiled a consultation paper outlining proposed measures aimed at fortifying the index derivatives (futures and options) framework. The initiative focuses on enhancing investor protection, market stability, and ensuring sustained capital formation. Here’s an overview of the proposed changes and their potential impact on derivatives traders:
Key Proposals
- Rationalization of Strike Prices for Options
- Existing Practice: Nifty and Bank Nifty options cover approximately 7-8% of index movement daily, with up to 70 options strikes for Nifty and 90 for Bank Nifty.
- Proposed Change: Limit the introduction of strike prices to no more than 50 at the time of contract launch, with uniform intervals around 4% of the prevailing price, extending up to 8% if necessary.
- Upfront Collection of Options Premium
- Existing Practice: Margins are collected for futures positions and short options positions, but there is no upfront collection of premiums from options buyers.
- Proposed Change: Collect option premiums on an upfront basis.
- Removal of Calendar Spread Benefit on Expiry Day
- Existing Practice: Calendar spread margins apply on expiry day, reducing margin requirements for contracts with different expiries.
- Proposed Change: No calendar spread margin for contracts expiring on the same day.
- Intraday Monitoring of Position Limits
- Existing Practice: Position limits are monitored at the end of the day by Clearing Corporations and Stock Exchanges.
- Proposed Change: Implement intraday monitoring of position limits for index derivatives, with short-term fixes and a phased approach for full implementation.
- Minimum Contract Size
- Existing Practice: Minimum contract size was set at Rs 5–10 lakh in 2015.
- Proposed Change: Phase 1: Increase minimum contract size to Rs 15-20 lakh; Phase 2: Raise to Rs 20-30 lakh after 6 months.
- Rationalization of Weekly Index Products
- Existing Practice: Weekly expiry of index derivatives results in expiries every day of the week.
- Proposed Change: Limit weekly expiries to one benchmark index per exchange.
- Increase in Margin Near Contract Expiry
- Existing Practice: No additional margin required in the last two trading days.
- Proposed Change: Introduce an additional 3% Extreme Loss Margin (ELM) on the penultimate day, increasing to 5% on the last day.
Rationale Behind the Proposals
SEBI’s Chief, Madhabi Puri Buch, highlighted a significant macro concern: an annual loss of Rs 50,000–60,000 crore of household savings through derivatives trading. This capital could potentially be redirected into IPOs, mutual funds, or other productive uses. SEBI aims to curb excessive speculative trading, which predominantly involves retail investors and accounts for around 50% of trading volumes in index derivatives.
The consultation paper follows a notable trading loss of Rs 51,689 crore incurred by 9.25 million unique individuals and proprietorship traders in FY24.
Next Steps
SEBI has invited public comments and suggestions on the consultation paper via its web portal or email, with a deadline of August 20, 2024.
Expert Opinions
Dhiraj Relli, MD & CEO of HDFC Securities, views these measures as a means to control speculative trading in equity derivatives. He notes that rationalizing weekly expiries will impact trading volumes significantly. Additionally, further measures, including product suitability and customer-level certification, may be introduced.
Foreign investment firm Jefferies predicts that the proposals will have varied impacts on market players, with exchanges and retail-focused brokers being the most affected.
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