SEBI Committee Set To Evaluate F&O Expert Panel Recommendations On Volatility, Leverage

The SMAC comprises SEBI officials, stock exchanges and leading brokerages and broker associations.

The turnover in the derivative segment has become a point of contention not only for the markets regulator, but also for the Reserve Bank of India and Finance Ministry.

Contract Size

The SMAC will consider the recommendation to increase the lot size of the derivatives contract from the current level of around Rs 5 lakh per contract value to between Rs 10-20 lakh per contract value. This will be done by increasing the lot size of the contracts. The argument made is that since the market volumes and turnover have nearly grown by 2.5-3 times in the in the last six years, the contract value should move in line with the market volumes and turnover.

Weekly Expiry

The expert panel has also recommended that exchanges should reconsider moving away from the daily expiry of option products. In any week, an exchange should designate one day as day of expiry for all its products. This will help do away with expiry day volatility on all five days of the week. Each exchange will have one day assigned for expiry. This will also reduce volatility across indices and any manipulation in stock prices of index components.

The panel hasn't recommended to reduce the number of weekly expiry products, but instead to club the expiry of products to single day per exchange.

Calendar Spread Benefits

The panel has also recommended to relook at the calendar spread benefits provided beyond the three months. The relook will encourage moving the volumes from short tenure trades to longer tenure trade. A recent study indicated the average cycle of trades have reduced considerably to under 40-minutes. Upfront margins are lower for longer duration spreads.

Rationalising Strike Prices

To increase the contract value, the panel has also recommended rationalising the strike prices by increasing the interval of the strikes in equity options. Increasing the intervals of the strike prices will increase the contract value and higher margin requirements.

Upfront Premiums

The expert committee has recommended to charge upfront premium from investors. Currently, while the brokers are supposed to provide upfront premium to the exchanges, they fund upfront margins through leverage based on collaterals placed with the brokers by the investors. The regulator could consider direct routing of upfront premiums, instead of routing it through brokers.

Increased Margins

The expert panel also considered increasing the intraday margins for F&O trades. But, this move is likely to face a strong pushback as industry has been complaining on the high margins collected in derivative trade.

SEBI recently shared data which claimed that the options premium turnover has risen from Rs 4.5 lakh crore in 2018 to Rs 140 lakh crore in 2024. The overall derivative turnover has risen from Rs 210 lakh crore to Rs 500 lakh crore during the same period, while the share of individuals in options trading has risen from 2% to 41% in the last six years.