SEBI F&O Framework: Five Key Measures That Safeguard Investors And Ensure Stability

The Securities and Exchange Board of India, on Tuesday, under its F&O framework, announced several new measures aimed at enhancing the equity index derivatives market. These new measures have been introduced to prioritise investor protection and market stability. They are based on recommendations from SEBI’s Expert Working Group on derivatives and the Secondary Market Advisory Committee.

In its circular released on Tuesday, SEBI noted that rising retail participation, short-term index options contracts, and increased speculative trading volumes on expiry days have affected the market.

Here are a few important takeaways from the new F&O framework.

According to the new measures, each exchange will provide derivatives contracts for only one of its benchmark indexes with a weekly expiry. This is in contrast to the two to four weekly options expiries that are being offered currently. This change will hit on the revenues for exchanges and brokerages.

The measure shall come into effect on Nov. 20.

The contract size will now increase to Rs 15 lakh from the current Rs 10 lakh; this will reduce the ability of traders to take larger leveraged positions as a larger contract size requires more margins.

This measure could curtail turnover and reduce transaction revenues for exchanges. It will also reduce the broking income from higher-net-worth individuals that are currently taking larger positions.

SEBI in the framework has also said that it will implement intraday monitoring of position limits in equity derivatives. Stock exchanges will take four position snapshots randomly during the day to ensure compliance with permissible limits. This measure will come into effect in April 2025.

Based on the new framework, SEBI will remove calendar spread treatment on the expiry day of contracts. This move is aimed at minimising basis risk on the high-volume trading days.

Calendar spread treatment is a form of trading strategy mostly used on the expiry days by institutional traders. It means taking opposing option positions in two differently dated expiries.

A calendar spread is a hedged position and hence has reduced upfront margin requirements.

This measure will be effective from February 2025.

Earlier option buyers had to provide broker collateral for buying options, but now after the new framework by SEBI option buyers will now have to pay upfront option premiums for the same. This is another move by the regulator to reduce traders ability to take a higher amount of leverage.

The move will reduce systematic risks and could cause marginal losses for the exchanges and brokers.

Along with the five key points, SEBI has increased tail risk coverage on options expiry day by imposing additional margins on all tail positions. This move aims to mitigate risks for both traders and brokers.

An option strike with an extremely low probability of exercise is known as a tail option. Option sellers often target these low-probability strikes, as they can frequently retain the entire premium from the options sold. However, these options come with very low premiums, and to achieve meaningful profits, traders typically need to take on large positions, resulting in significant leverage. Consequently, if the probability is missed, then the traders have to bear heavy losses.