'No Free Lunches' After New SEBI Policy Makes F&O Expenses Payable Upfront

As lot sizes increase, according to the new guidelines introduced by Indian financial markets regulator Securities and Exchange Board of India, equity derivative traders will need to pay amounts greater in multifold.

The first among the six measures announced by SEBI on Oct. 1 was the upfront collection of option premiums from buyers.

While the change is set to come into effect starting Feb. 1, 2025, this eliminates a key incentive provided by brokers that allowed traders to place orders at a fraction of the actual cost.

Brokers as well as discount brokerages earlier provided an option to only pay a part of the total premium required to place the order and pay the full amount at the end of the day, in case the contract was carried forward.

Given a situation where the position taken was squared off on an intraday basis (selling of a contract after buying it earlier on the very same day), a trader may not be required to ever produce the full margin requirement and only pay the required fee, including the applicable brokerage amount and taxes.

The applicable fee, along with the required taxes, could then be deducted from the amount earned by the trader on the trade in case a profit was made, with the remaining amount then being transferred to their account.

"Brokerages often offered tailored margin terms to select high-volume clients, reducing their required capital, while some brokers provided flexibility by allowing traders to pay part of the premium immediately and settle the rest within a few days, as per the T+2 settlement," said Rajesh Palviya, senior vice president of technical and derivatives research at Axis Securities.

"With the shift towards uniform margin collection practices, individual agreements have become rarer, forcing even high-volume traders to provide full premium amounts and limiting retail traders' flexibility," he said.

The requirement of paying the full premium upon the placement of the order, combined with the increase in lot sizes, set to come into effect on Nov. 20, will considerably increase the margin required to place such orders in the future.

SEBI mandated increasing the notional value of contracts to Rs 15 lakh in the first phase and eventually increasing them to Rs 20 lakh. The regulator highlighted a need for such a measure, given that it had been last revised in 2015.

Since the last revision in the notional value of contracts, the Indian investor base has grown to over five times its size.

The National Stock Exchange on Friday announced an increase in lot size for Nifty 50 derivative contracts from the earlier 25, to now 75.

Let us consider an illustrative example. The premium on the money call option at the 24,950 strike, which is set to expire four days later on Oct. 24, opened at Rs 114.65 on Monday, Oct. 21, a day when the Nifty had opened at 24,956.

With the current lot size of 25, a Nifty 50 option buyer for the above call would be required to pay a premium of Rs 28,640 to buy 10 lots—excluding broking brokerage fees, transaction charges, and taxes.

In the case where a brokerage allowed the trader to pay only 50% of the full amount required, the trader would transfer Rs 14,320 to the broker.

With the lot size increasing to 75, the full figure would now be Rs 85,920, in order to trade the same number of lots at 10. This is a six-fold jump.

The multiple by which the payment required increases is based on the increase in lot size and degree of freedom that the broker could earlier provide to traders.